G.R. Nos.

173654-765
2008

August 28,

PEOPLE OF THE PHILIPPINES, petitioner,

vs.
TERESITA
PUIG
and
ROMEO
PORRAS, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review under Rule 45 of
the Revised Rules of Court with petitioner
People of the Philippines, represented by the
Office of the Solicitor General, praying for the
reversal of the Orders dated 30 January 2006
and 9 June 2006 of the Regional Trial Court
(RTC) of the 6th Judicial Region, Branch 68,
Dumangas, Iloilo, dismissing the 112 cases of
Qualified Theft filed against respondents
Teresita Puig and Romeo Porras, and denying
petitioners Motion for Reconsideration, in
Criminal Cases No. 05-3054 to 05-3165.
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial
Prosecutors Office filed before Branch 68 of
the RTC in Dumangas, Iloilo, 112 cases of
Qualified Theft against respondents Teresita
Puig (Puig) and Romeo Porras (Porras) who
were
the
Cashier
and
Bookkeeper,
respectively, of private complainant Rural
Bank of Pototan, Inc. The cases were
docketed as Criminal Cases No. 05-3054 to
05-3165.
The allegations in the Informations 1 filed
before the RTC were uniform and pro-forma,

except for the amounts, date and time of

commission, to wit:
INFORMATION
That on or about the 1st day of August,
2002, in the Municipality of Pototan,
Province of Iloilo, Philippines, and
within
the
jurisdiction
of
this
Honorable
Court,
above-named
[respondents],
conspiring,
confederating,
and
helping
one
another, with
grave
abuse
of
confidence,
being
the Cashier and Bookkeeper of the
Rural Bank of Pototan, Inc., Pototan,
Iloilo, without the knowledge and/or
consent of the management of the
Bank and with intent of gain, did then
and there willfully, unlawfully and
feloniously take, steal and carry away
the sum of FIFTEEN THOUSAND PESOS
(P15,000.00), Philippine Currency, to
the damage and prejudice of the said
bank in the aforesaid amount.
After perusing the Informations in these
cases, the trial court did not find the
existence of probable cause that would have
necessitated the issuance of a warrant of
arrest based on the following grounds:
(1) the element of taking without
the consent of the owners was
missing on the ground that it is the
depositors-clients, and not the Bank,
which filed the complaint in these
cases, who are the owners of the
money allegedly taken by respondents
and hence, are the real parties-ininterest; and

(2) the Informations are bereft of the

phrase
alleging
"dependence,
guardianship or vigilance between
the respondents and the offended
party that would have created a
high
degree
of
confidence
between
them
which
the
respondents could have abused."
It added that allowing the 112 cases for
Qualified Theft filed against the respondents
to push through would be violative of the
right of the respondents under Section 14(2),
Article III of the 1987 Constitution which
states that in all criminal prosecutions, the
accused shall enjoy the right to be informed
of the nature and cause of the accusation
against him. Following Section 6, Rule 112 of
the Revised Rules of Criminal Procedure, the
RTC dismissed the cases on 30 January 2006
and refused to issue a warrant of arrest
against Puig and Porras.
A Motion for Reconsideration2 was filed on 17
April 2006, by the petitioner.
On 9 June 2006, an Order3 denying
petitioners Motion for Reconsideration was
issued by the RTC, finding as follows:
Accordingly, the prosecutions Motion
for Reconsideration should be, as it
hereby, DENIED. The Order dated
January 30, 2006 STANDS in all
respects.
Petitioner
went
directly
to
this
Court via Petition
for
Review
on Certiorari under Rule 45, raising the sole
legal issue of:

WHETHER
OR
NOT
THE
112
INFORMATIONS FOR QUALIFIED THEFT
SUFFICIENTLY ALLEGE THE ELEMENT
OF TAKING WITHOUT THE CONSENT OF
THE OWNER, AND THE QUALIFYING
CIRCUMSTANCE OF GRAVE ABUSE OF
CONFIDENCE.
Petitioner prays that judgment be rendered
annulling and setting aside the Orders dated
30 January 2006 and 9 June 2006 issued by
the trial court, and that it be directed to
proceed with Criminal Cases No. 05-3054 to
05-3165.
Petitioner explains that under Article 1980 of
the New Civil Code, "fixed, savings, and
current deposits of money in banks and
similar institutions shall be governed by the
provisions concerning simple loans." Corollary
thereto, Article 1953 of the same Code
provides that "a person who receives a loan
of money or any other fungible thing acquires
the ownership thereof, and is bound to pay to
the creditor an equal amount of the same
kind and quality." Thus, it posits that the
depositors who place their money with the
bank are considered creditors of the bank.
The bank acquires ownership of the money
deposited by its clients, making the money
taken by respondents as belonging to the
bank.
Petitioner also insists that the Informations
sufficiently allege all the elements of the
crime of qualified theft, citing that a perusal
of the Informations will show that they
specifically allege that the respondents were
the Cashier and Bookkeeper of the Rural Bank
of Pototan, Inc., respectively, and that they
took various amounts of money with grave

abuse of confidence, and without the

knowledge and consent of the bank, to the
damage and prejudice of the bank.
Parenthetically, respondents raise procedural
issues. They challenge the petition on the
ground that a Petition for Review on Certiorari
via Rule 45 is the wrong mode of appeal
because a finding of probable cause for the
issuance of a warrant of arrest presupposes
evaluation of facts and circumstances, which
is not proper under said Rule.
Respondents
further
claim
that
the
Department of Justice (DOJ), through the
Secretary of Justice, is the principal party to
file a Petition for Review on Certiorari,
considering that the incident was indorsed by
the DOJ.
We find merit in the petition.
The dismissal by the RTC of the criminal cases
was allegedly due to insufficiency of the
Informations and, therefore, because of this
defect, there is no basis for the existence of
probable cause which will justify the issuance
of the warrant of arrest. Petitioner assails the
dismissal contending that the Informations for
Qualified Theft sufficiently state facts which
constitute (a) the qualifying circumstance
of grave abuse of confidence; and (b) the
element of taking, with intent to gain and
without the consent of the owner, which is
the Bank.
In determining the existence of probable
cause to issue a warrant of arrest, the RTC
judge found the allegations in the Information
inadequate. He ruled that the Information
failed to state facts constituting the qualifying

circumstance
of grave
abuse
of
confidence and the element of taking without
the consent of the owner, since the owner of
the money is not the Bank, but the depositors
therein. He also cites People v. Koc Song,4 in
which this Court held:
There must be allegation in the
information and proof of a relation, by
reason of dependence, guardianship or
vigilance, between the respondents
and the offended party that has
created a high degree of confidence
between them, which the respondents
abused.
At this point, it needs stressing that the RTC
Judge based his conclusion that there was no
probable cause simply on the insufficiency of
the allegations in the Informations concerning
the facts constitutive of the elements of the
offense charged. This, therefore, makes the
issue of sufficiency of the allegations in the
Informations the focal point of discussion.
Qualified Theft, as defined and punished
under Article 310 of the Revised Penal Code,
is committed as follows, viz:
ART. 310. Qualified Theft. The crime
of theft shall be punished by the
penalties next higher by two degrees
than those respectively specified in
the
next
preceding
article,
if
committed by a domestic servant,
or with grave abuse of confidence, or
if the property stolen is motor vehicle,
mail matter or large cattle or consists
of coconuts taken from the premises of
a plantation, fish taken from a
fishpond or fishery or if property is

taken on the occasion of fire,

earthquake,
typhoon,
volcanic
eruption, or any other calamity,
vehicular accident or civil disturbance.
(Emphasis supplied.)
Theft, as defined in Article 308 of the Revised
Penal Code, requires the physical taking of
anothers property without violence or
intimidation against persons or force upon
things. The elements of the crime under this
Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal
another;

property

belonging

to

4. Absence of violence or intimidation

against persons or force upon things.
To fall under the crime of Qualified Theft, the
following elements must concur:
1. Taking of personal property;
2. That the said property belongs to
another;
3. That the said taking be done with
intent to gain;
4. That it be done without the owners
consent;
5. That it be accomplished without the
use of violence or intimidation against
persons, nor of force upon things;

6. That it be done with grave abuse of

confidence.

Pototan, Iloilo, without the knowledge and/or consent of the

On the sufficiency of the Information, Section

6, Rule 110 of the Rules of Court
requires, inter alia, that the information must
state the acts or omissions complained of as
constitutive of the offense.

It is beyond doubt that tellers, Cashiers,

Bookkeepers and other employees of a Bank
who come into possession of the monies
deposited therein enjoy the confidence
reposed in them by their employer. Banks, on
the other hand, where monies are deposited,
are considered the owners thereof. This is
very clear not only from the express
provisions of the law, but from established
jurisprudence. The relationship between
banks and depositors has been held to be
that of creditor and debtor. Articles 1953 and
1980 of the New Civil Code, as appropriately
pointed out by petitioner, provide as follows:

On the manner of how the Information should

be worded, Section 9, Rule 110 of the Rules of
Court, is enlightening:
Section 9. Cause of the accusation.
The acts or omissions complained of
as constituting the offense and the
qualifying
and
aggravating
circumstances must be stated in
ordinary and concise language and not
necessarily in the language used in
the statute but in terms sufficient to
enable
a
person
of
common
understanding to know what offense is
being charged as well as its qualifying
and aggravating circumstances and
for the court to pronounce judgment.
It is evident that the Information need not use
the exact language of the statute in alleging
the acts or omissions complained of as
constituting the offense. The test is whether it
enables a person of common understanding
to know the charge against him, and the
court to render judgment properly.5
The portion of the Information relevant to this
discussion reads:
A]bove-named

[respondents],

conspiring,

confederating,

and

helping one another, with grave abuse of confidence, being

the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,

management of the Bank x x x.

Article 1953. A person who receives a

loan of money or any other fungible
thing acquires the ownership thereof,
and is bound to pay to the creditor an
equal amount of the same kind and
quality.
Article 1980. Fixed, savings, and
current deposits of money in banks
and similar institutions shall be
governed by the provisions concerning
loan.
In a long line of cases involving Qualified
Theft, this Court has firmly established the
nature of possession by the Bank of the
money deposits therein, and the duties being
performed by its employees who have
custody of the money or have come into
possession of it. The Court has consistently
considered the allegations in the Information
that such employees acted with grave abuse
of confidence, to the damage and prejudice of

the Bank, without particularly referring to it

as owner of the money deposits, as sufficient
to make out a case of Qualified Theft. For a
graphic
illustration,
we
cite Roque
v.
People,6 where the accused teller was
convicted for Qualified Theft based on this
Information:
That on or about the 16th day of
November, 1989, in the municipality of
Floridablanca, province of Pampanga,
Philippines and within the jurisdiction
of his Honorable Court, the abovenamed accused ASUNCION GALANG
ROQUE,
being
then
employed
as teller of the Basa Air Base Savings
and Loan Association Inc. (BABSLA)
with office address at Basa Air Base,
Floridablanca, Pampanga, and as such
was authorized and reposed with the
responsibility to receive and collect
capital
contributions
from
its
member/contributors
of
said
corporation, and having collected and
received in her capacity as teller of the
BABSLA the sum of TEN THOUSAND
PESOS (P10,000.00), said accused,
with intent of gain, with grave abuse
of confidence and without the
knowledge and consent of said
corporation, did then and there
willfully, unlawfully and feloniously
take, steal and carry away the amount
of P10,000.00, Philippine currency, by
making it appear that a certain
depositor by the name of Antonio
Salazar withdrew from his Savings
Account No. 1359, when in truth and in
fact said Antonio Salazar did not
withdr[a]w
the
said
amount
of P10,000.00 to the damage and

prejudice
amount
currency.

of BABSLA in
of P10,000.00,

the total
Philippine

In convicting the therein appellant, the Court

held that:
[S]ince the teller occupies a position of
confidence, and the bank places
money in the tellers possession due
to the confidence reposed on the
teller, the felony of qualified theft
would be committed.7
Also in People
v. Sison,8 the Branch
Operations Officer was convicted of the crime
of Qualified Theft based on the Information as
herein cited:
That in or about and during the period
compressed between January 24, 1992
and February 13, 1992, both dates
inclusive, in the City of Manila,
Philippines, the said accused did then
and there wilfully, unlawfully and
feloniously, with intent of gain and
without the knowledge and consent of
the owner thereof, take, steal and
carry away the following, to wit:
Cash
money
amounting
to P6,000,000.00
in
different
denominations
belonging
to
the
PHILIPPINE
COMMERCIAL
INTERNATIONAL BANK (PCIBank for
brevity),
Luneta
Branch,
Manila
represented by its Branch Manager,
HELEN U. FARGAS, to the damage and
prejudice of the said owner in the
aforesaid amount of P6,000,000.00,
Philippine Currency.

That in the commission of the said

offense, herein accused acted with
grave abuse of confidence and
unfaithfulness, he being the Branch
Operation
Officer of
the
said
complainant and as such he had free
access to the place where the said
amount of money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant
against his employer, the Philippine
Commercial
and
Industrial
Bank
(PCIB), is Qualified Theft. Appellant
could not have committed the crime
had he not been holding the position
of Luneta Branch Operation Officer
which gave him not only sole access to
the bank vault xxx. The management
of the PCIB reposed its trust and
confidence in the appellant as its
Luneta Branch Operation Officer, and
it was this trust and confidence which
he exploited to enrich himself to the
damage and prejudice of PCIB x x x.9
From another end, People v. Locson,10 in
addition to People v. Sison, described the
nature of possession by the Bank. The money
in this case was in the possession of the
defendant as receiving teller of the bank, and
the possession of the defendant was the
possession of the Bank. The Court held
therein that when the defendant, with grave
abuse of confidence, removed the money and
appropriated it to his own use without the
consent of the Bank, there was taking as
contemplated in the crime of Qualified
Theft.11

Conspicuously, in all of the foregoing cases,

where the Informations merely alleged the
positions of the respondents; that the crime
was committed with grave abuse of
confidence, with intent to gain and without
the knowledge and consent of the Bank,
without necessarily stating the phrase being
assiduously insisted upon by respondents, "of
a relation by reason of dependence,
guardianship or vigilance, between the
respondents and the offended party that
has created a high degree of confidence
between
them,
which
respondents
12
abused," and without employing the word
"owner" in lieu of the "Bank" were considered
to have satisfied the test of sufficiency of
allegations.
As regards the respondents who were
employed as Cashier and Bookkeeper of the
Bank in this case, there is even no reason to
quibble on the allegation in the Informations
that they acted with grave abuse of
confidence. In fact, the Information which
alleged grave abuse of confidence by accused
herein is even more precise, as this is exactly
the requirement of the law in qualifying the
crime of Theft.
In summary, the Bank acquires ownership of
the money deposited by its clients; and the
employees of the Bank, who are entrusted
with the possession of money of the Bank due
to the confidence reposed in them, occupy
positions of confidence. The Informations,
therefore, sufficiently allege all the essential
elements constituting the crime of Qualified
Theft.
On the theory of the defense that the DOJ is
the principal party who may file the instant

petition, the ruling in Mobilia Products, Inc. v.

Hajime Umezawa13 is instructive. The Court
thus enunciated:
In a criminal case in which the
offended party is the State, the
interest of the private complainant or
the offended party is limited to the
civil liability arising therefrom. Hence,
if a criminal case is dismissed by the
trial court or if there is an acquittal, a
reconsideration of the order of
dismissal
or
acquittal
may
be
undertaken, whenever legally feasible,
insofar as the criminal aspect thereof
is concerned and may be made only
by the public prosecutor; or in the
case of an appeal, by the State only,
through the OSG. x x x.
On the alleged wrong mode of appeal by
petitioner, suffice it to state that the rule is
well-settled that in appeals by certiorari
under Rule 45 of the Rules of Court, only
errors of law may be raised,14 and herein
petitioner certainly raised a question of law.
As an aside, even if we go beyond the
allegations of the Informations in these cases,
a closer look at the records of the preliminary
investigation conducted will show that,
indeed, probable cause exists for the
indictment of herein respondents. Pursuant to
Section 6, Rule 112 of the Rules of Court, the
judge shall issue a warrant of arrest only upon
a finding of probable cause after personally
evaluating the resolution of the prosecutor
and its supporting evidence. Soliven v.
Makasiar,15 as
reiterated
inAllado
v.
Driokno,16 explained that probable cause for
the issuance of a warrant of arrest is the

existence of such facts and circumstances

that would lead a reasonably discreet and
prudent person to believe that an offense has
been committed by the person sought to be
arrested.17 The records reasonably indicate
that the respondents may have, indeed,
committed the offense charged.
Before closing, let it be stated that while it is
truly imperative upon the fiscal or the judge,
as the case may be, to relieve the
respondents from the pain of going through a
trial once it is ascertained that no probable
cause exists to form a sufficient belief as to
the guilt of the respondents, conversely, it is
also equally imperative upon the judge to
proceed with the case upon a showing that
there is a prima faciecase against the
respondents.
WHEREFORE, premises considered, the
Petition
for
Review
on Certiorari is
hereby GRANTED. The Orders dated 30
January 2006 and 9 June 2006 of the RTC
dismissing Criminal Cases No. 05-3054 to 053165 are REVERSED and SET ASIDE. Let the
corresponding Warrants of Arrest issue
against herein respondents TERESITA PUIG
and ROMEO PORRAS. The RTC Judge of
Branch 68, in Dumangas, Iloilo, is directed to
proceed with the trial of Criminal Cases No.
05-3054
to
05-3165,
inclusive,
with
reasonable dispatch. No pronouncement as to
costs.
SO ORDERED.
Ynares-Santiago,
Chairperson,
AustriaMartinez,
Reyes,
Leonardo-de
Castro *, JJ., concur.

G.R. No. L-60033 April 4, 1984

TEOFISTO GUINGONA, JR., ANTONIO I.
MARTIN,
and
TERESITA
SANTOS, petitioners,
vs.
THE CITY FISCAL OF MANILA, HON. JOSE
B. FLAMINIANO, ASST. CITY FISCAL
FELIZARDO N. LOTA and CLEMENT
DAVID, respondents.

MAKASIAR, Actg. C.J.:+.wph!1

This is a petition for prohibition and injunction
with a prayer for the immediate issuance of
restraining order and/or writ of preliminary
injunction filed by petitioners on March 26,
1982.
On March 31, 1982, by virtue of a court
resolution issued by this Court on the same
date, a temporary restraining order was duly
issued ordering the respondents, their
officers, agents,
representatives and/or
person or persons acting upon their
(respondents') orders or in their place or
stead to refrain from proceeding with the
preliminary investigation in Case No. 8131938
of the Office of the City Fiscal of Manila (pp.
47-48, rec.). On January 24, 1983, private
respondent Clement David filed a motion to
lift restraining order which was denied in the
resolution of this Court dated May 18, 1983.
As can be gleaned from the above, the
instant petition seeks to prohibit public

respondents from proceeding with the

preliminary investigation of I.S. No. 81-31938,
in which petitioners were charged by private
respondent Clement David, with estafa and
violation of Central Bank Circular No. 364 and
related
regulations
regarding
foreign
exchange transactions principally, on the
ground of lack of jurisdiction in that the
allegations of the charged, as well as the
testimony of private respondent's principal
witness and the evidence through said
witness, showed that petitioners' obligation is
civil in nature.
For purposes of brevity, We hereby adopt the
antecedent facts narrated by the Solicitor
General in its Comment dated June 28,1982,
as follows:t.hqw
On December 23,1981, private
respondent David filed I.S. No.
81-31938 in the Office of the
City Fiscal of Manila, which case
was assigned to respondent
Lota
for
preliminary
investigation (Petition, p. 8).
In I.S. No. 81-31938, David
charged petitioners (together
with one Robert Marshall and
the following directors of the
Nation
Savings
and
Loan
Association,
Inc.,
namely
Homero Gonzales, Juan Merino,
Flavio Macasaet, Victor Gomez,
Jr., Perfecto Manalac, Jaime V.
Paz, Paulino B. Dionisio, and
one John Doe) with estafa and
violation
of
Central
Bank
Circular No. 364 and related
Central Bank regulations on

foreign exchange transactions,

allegedly committed as follows
(Petition,
Annex
"A"):t.
hqw
"From March 20,
1979 to March,
1981,
David
invested with the
Nation
Savings
and
Loan
Association,
(hereinafter
called NSLA) the
sum
of
P1,145,546.20 on
nine
deposits,
P13,531.94
on
savings account
deposits (jointly
with his sister,
Denise
Kuhne),
US$10,000.00 on
time
deposit,
US$15,000.00
under a receipt
and guarantee of
payment
and
US$50,000.00
under a receipt
dated June 8,
1980 (au jointly
with
Denise
Kuhne),
that
David
was
induced
into
making
the
aforestated
investments by
Robert Marshall
an
Australian

national who was

allegedly a close
associate
of
petitioner
Guingona
Jr.,
then
NSLA
President,
petitioner Martin,
then
NSLA
Executive
VicePresident
of
NSLA
and
petitioner
Santos,
then
NSLA
General
Manager; that on
March 21, 1981
N LA was placed
under
receivership
by
the Central Bank,
so that David
filed
claims
therewith for his
investments and
those
of
his
sister; that on
July 22, 1981
David received a
report from the
Central Bank that
only P305,821.92
of
those
investments
were entered in
the records of
NSLA;
that,
therefore,
the
respondents
in
I.S. No. 81-31938
misappropriated

the balance of
the investments,
at the same time
violating Central
Bank Circular No.
364 and related
Central
Bank
regulations
on
foreign exchange
transactions; that
after
demands,
petitioner
Guingona Jr. paid
only
P200,000.00,
thereby reducing
the
amounts
misappropriated
to
P959,078.14
and
US$75,000.00."
Petitioners, Martin and Santos,
filed a joint counter-affidavit
(Petition, Annex' B') in which
they stated the following.t.
hqw
"That
Martin
became
President
of
NSLA in March
1978 (after the
resignation
of
Guingona,
Jr.)
and served as
such
until
October
30,
1980,
while
Santos
was
General Manager

up to November
1980;
that
because
NSLA
was urgently in
need of funds
and at David's
insistence,
his
investments
were treated as
special- accounts
with
interest
above the legal
rate, an recorded
in
separate
confidential
documents only
a
portion
of
which were to be
reported because
he did not want
the
Australian
government
to
tax
his
total
earnings (nor) to
know his total
investments; that
all
transactions
with David were
recorded except
the
sum
of
US$15,000.00
which
was
a
personal loan of
Santos;
that
David's check for
US$50,000.00
was
cleared
through
Guingona,
Jr.'s
dollar
account
because
NSLA

did not have one,

that a draft of
US$30,000.00
was placed in the
name of one Paz
Roces because of
a
pending
transaction with
her;
that
the
Philippine
Deposit
Insurance
Corporation had
already
reimbursed
David within the
legal limits; that
majority of the
stockholders
of
NSLA had filed
Special
Proceedings No.
82-1695 in the
Court
of
First
Instance
to
contest
its
(NSLA's) closure;
that after NSLA
was placed under
receivership,
Martin executed
a
promissory
note in David's
favor and caused
the transfer to
him of a nine and
on behalf (9 1/2)
carat
diamond
ring with a net
value
of
P510,000.00;

and, that the

liabilities of NSLA
to David were
civil in nature."
Petitioner, Guingona, Jr., in his
counter-affidavit
(Petition,
Annex'
C')
stated
the
following:t.hqw
"That he had no
hand whatsoever
in
the
transactions
between
David
and NSLA since
he (Guingona Jr.)
had resigned as
NSLA president
in March 1978, or
prior to those
transactions; that
he assumed a
portion o; the
liabilities of NSLA
to David because
of the latter's
insistence
that
he placed his
investments with
NSLA because of
his
faith
in
Guingona,
Jr.;
that
in
a
Promissory Note
dated June 17,
1981
(Petition,
Annex "D") he
(Guingona,
Jr.)
bound himself to
pay David the

sums
of
P668.307.01 and
US$37,500.00 in
stated
installments; that
he (Guingona, Jr.)
secured payment
of those amounts
with
second
mortgages over
two (2) parcels of
land
under
a
deed of Second
Real
Estate
Mortgage
(Petition, Annex
"E") in which it
was
provided
that
the
mortgage
over
one (1) parcel
shall
be
cancelled
upon
payment of onehalf
of
the
obligation
to
David; that he
(Guingona,
Jr.)
paid P200,000.00
and
tendered
another
P300,000.00
which
David
refused
to
accept,
hence,
he (Guingona, Jr.)
filed Civil Case
No. Q-33865 in
the Court of First
Instance of Rizal
at Quezon City,

to
effect
the
release of the
mortgage
over
one (1) of the
two parcels of
land conveyed to
David
under
second
mortgages."
At
the
inception
of
the
preliminary investigation before
respondent Lota, petitioners
moved to dismiss the charges
against them for lack of
jurisdiction because David's
claims allegedly comprised a
purely civil obligation which
was itself novated. Fiscal Lota
denied the motion to dismiss
(Petition, p. 8).
But, after the presentation of
David's
principal
witness,
petitioners filed the instant
petition
because:
(a)
the
production of the Promisory
Notes, Banker's Acceptance,
Certificates of Time Deposits
and Savings Account allegedly
showed that the transactions
between David and NSLA were
simple
loans,
i.e.,
civil
obligations on the part of NSLA
which were novated when
Guingona,
Jr.
and
Martin
assumed them; and (b) David's
principal
witness
allegedly
testified that the duplicate
originals
of
the
aforesaid
instruments of indebtedness

were all on file with NSLA,

contrary to David's claim that
some of his investments were
not record (Petition, pp. 8-9).
Petitioners alleged that they
did not exhaust available
administrative
remedies
because to do so would be
futile (Petition, p. 9) [pp. 153157, rec.].
As correctly pointed out by the Solicitor
General, the sole issue for resolution is
whether public respondents acted without
jurisdiction when they investigated the
charges (estafa and violation of CB Circular
No. 364 and related regulations regarding
foreign exchange transactions) subject matter
of I.S. No. 81-31938.
There is merit in the contention of the
petitioners that their liability is civil in nature
and therefore, public respondents have no
jurisdiction over the charge of estafa.
A casual perusal of the December 23, 1981
affidavit. complaint filed in the Office of the
City Fiscal of Manila by private respondent
David against petitioners Teopisto Guingona,
Jr., Antonio I. Martin and Teresita G. Santos,
together with one Robert Marshall and the
other directors of the Nation Savings and
Loan Association, will show that from March
20, 1979 to March, 1981, private respondent
David, together with his sister, Denise Kuhne,
invested with the Nation Savings and Loan
Association the sum of P1,145,546.20 on time
deposits covered by Bankers Acceptances
and Certificates of Time Deposits and the sum
of P13,531.94 on savings account deposits

covered by passbook nos. 6-632 and 29-742,

or a total of P1,159,078.14 (pp. 15-16, roc.). It
appears further that private respondent
David, together with his sister, made
investments in the aforesaid bank in the
amount of US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the
aforesaid bank was placed under receivership
on March 21, 1981, petitioners Guingona and
Martin, upon the request of private
respondent David, assumed the obligation of
the bank to private respondent David by
executing on June 17, 1981 a joint promissory
note in favor of private respondent
acknowledging
an
indebtedness
of
Pl,336,614.02 and US$75,000.00 (p. 80, rec.).
This promissory note was based on the
statement of account as of June 30, 1981
prepared by the private respondent (p. 81,
rec.). The amount of indebtedness assumed
appears to be bigger than the original claim
because of the added interest and the
inclusion of other deposits of private
respondent's sister in the amount of
P116,613.20.
Thereafter, or on July 17, 1981, petitioners
Guingona and Martin agreed to divide the
said indebtedness, and petitioner Guingona
executed another promissory note antedated
to June 17, 1981 whereby he personally
acknowledged
an
indebtedness
of
P668,307.01 (1/2 of P1,336,614.02) and
US$37,500.00 (1/2 of US$75,000.00) in favor
of private respondent (p. 25, rec.). The
aforesaid promissory notes were executed as
a result of deposits made by Clement David
and Denise Kuhne with the Nation Savings
and Loan Association.

Furthermore, the various pleadings and

documents filed by private respondent David,
before this Court indisputably show that he
has indeed invested his money on time and
savings deposits with the Nation Savings and
Loan Association.
It must be pointed out that when private
respondent David invested his money on
nine. and savings deposits with the aforesaid
bank, the contract that was perfected was a
contract of simple loan or mutuum and not a
contract of deposit. Thus, Article 1980 of the
New Civil Code provides that:t.hqw
Article 1980. Fixed, savings,
and current deposits of-money
in banks and similar institutions
shall be governed by the
provisions concerning simple
loan.
In the case of Central Bank of the Philippines
vs. Morfe (63 SCRA 114,119 [1975], We
said:t.hqw
It should be noted that fixed,
savings, and current deposits of
money in banks and similar
institutions
are
hat
true
deposits. are considered simple
loans and, as such, are not
preferred credits (Art. 1980
Civil Code; In re Liquidation of
Mercantile Batik of China Tan
Tiong
Tick
vs.
American
Apothecaries Co., 66 Phil 414;
Pacific Coast Biscuit Co. vs.
Chinese Grocers Association 65
Phil. 375; Fletcher American
National Bank vs. Ang Chong

UM 66 PWL 385; Pacific

Commercial Co. vs. American
Apothecaries Co., 65 PhiL 429;
Gopoco Grocery vs. Pacific
Coast Biscuit CO.,65 Phil. 443)."
This Court also declared in the recent case
of Serrano
vs.
Central
Bank
of
the
Philippines (96 SCRA 102 [1980]) that:t.
hqw
Bank deposits are in the nature
of irregular deposits. They are
really 'loans because they earn
interest. All kinds of bank
deposits,
whether
fixed,
savings, or current are to be
treated as loans and are to be
covered by the law on loans
(Art. 1980 Civil Code Gullas vs.
Phil. National Bank, 62 Phil.
519). Current
and
saving
deposits, are loans to a bank
because it can use the same.
The petitioner here in making
time
deposits
that
earn
interests
will
respondent
Overseas Bank of Manila was in
reality a creditor of the
respondent Bank and not a
depositor. The respondent Bank
was in turn a debtor of
petitioner. Failure
of
the
respondent Bank to honor the
time deposit is failure to pay its
obligation as a debtor and not
a breach of trust arising from a
depositary's failure to return
the subject matter of the
deposit (Emphasis supplied).

Hence, the relationship between the private

respondent and the Nation Savings and Loan
Association is that of creditor and debtor;
consequently, the ownership of the amount
deposited was transmitted to the Bank upon
the perfection of the contract and it can make
use of the amount deposited for its banking
operations, such as to pay interests on
deposits and to pay withdrawals. While the
Bank has the obligation to return the amount
deposited, it has, however, no obligation to
return or deliver the same money that was
deposited. And, the failure of the Bank to
return the amount deposited will not
constitute estafa through misappropriation
punishable under Article 315, par. l(b) of the
Revised Penal Code, but it will only give rise
to civil liability over which the public
respondents have no- jurisdiction.
WE have already laid down the rule that:t.
hqw
In order that a person can be
convicted under the abovequoted provision, it must be
proven that he has the
obligation
to
deliver
or return the
some
money,
goods or personal property that
he receivedPetitioners had no
such obligation to return the
same money, i.e., the bills or
coins, which they received from
private respondents. This is so
because as clearly as stated in
criminal complaints, the related
civil
complaints
and
the
supporting sworn statements,
the sums of money that
petitioners received were loans.

The nature of simple loan is

defined in Articles 1933 and
1953 of the Civil Code.t.
hqw
"Art. 1933. By
the contract of
loan, one of the
parties delivers
to another, either
something
not
consumable
so
that the latter
may
use
the
same
for
a
certain time- and
return it, in which
case the contract
is
called
a
commodatum; or
money or other
consumable
thing, upon the
condition
that
the
same
amount of the
same kind and
quality shall he
paid in which
case the contract
is simply called a
loan or mutuum.
"Commodatum is
essentially
gratuitous.
"Simple loan may
be gratuitous or
with a stipulation
to pay interest.

"In commodatum
the bailor retains
the ownership of
the thing loaned
while in simple
loan, ownership
passes to the
borrower.
"Art. 1953. A
person
who
receives a loan of
money or any
other
fungible
thing
acquires
the
ownership
thereof, and is
bound to pay to
the creditor an
equal amount of
the same kind
and quality."
It can be readily noted from the
above-quoted provisions that in
simple loan (mutuum), as
contrasted to commodatum the
borrower acquires ownership of
the money, goods or personal
property borrowed Being the
owner,
the
borrower
can
dispose of the thing borrowed
(Article 248, Civil Code) and his
act will not be considered
misappropriation thereof' (Yam
vs. Malik, 94 SCRA 30, 34
[1979]; Emphasis supplied).
But even granting that the failure of the bank
to pay the time and savings deposits of
private respondent David would constitute a

violation of paragraph 1(b) of Article 315 of

the Revised Penal Code, nevertheless any
incipient criminal liability was deemed
avoided, because when the aforesaid bank
was placed under receivership by the Central
Bank, petitioners Guingona and Martin
assumed the obligation of the bank to private
respondent David, thereby resulting in the
novation of the original contractual obligation
arising from deposit into a contract of loan
and converting the original trust relation
between the bank and private respondent
David into an ordinary debtor-creditor relation
between
the
petitioners
and
private
respondent. Consequently, the failure of the
bank or petitioners Guingona and Martin to
pay the deposits of private respondent would
not constitute a breach of trust but would
merely be a failure to pay the obligation as a
debtor.
Moreover, while it is true that novation does
not extinguish criminal liability, it may
however, prevent the rise of criminal liability
as long as it occurs prior to the filing of the
criminal
information
in
court.
Thus,
in Gonzales vs. Serrano ( 25 SCRA 64, 69
[1968]) We held that:t.hqw
As pointed out in People vs.
Nery, novation prior to the
filing
of
the
criminal
information as in the case at
bar may convert the relation
between the parties into an
ordinary
creditor-debtor
relation,
and
place
the
complainant in estoppel to
insist
on
the
original
transaction or "cast doubt on
the true nature" thereof.

Again, in the latest case of Ong vs. Court of

Appeals (L-58476, 124 SCRA 578, 580-581
[1983] ), this Court reiterated the ruling
in People vs. Nery ( 10 SCRA 244 [1964] ),
declaring that:t.hqw
The novation theory may
perhaps apply prior to the
filling
of
the
criminal
information in court by the
state prosecutors because up
to that time the original trust
relation may be converted by
the parties into an ordinary
creditor-debtor
situation,
thereby
placing
the
complainant in estoppel to
insist on the original trust. But
after the justice authorities
have taken cognizance of the
crime and instituted action in
court, the offended party may
no
longer
divest
the
prosecution of its power to
exact the criminal liability, as
distinguished from the civil.
The crime being an offense
against the state, only the
latter can renounce it (People
vs. Gervacio, 54 Off. Gaz. 2898;
People vs. Velasco, 42 Phil. 76;
U.S. vs. Montanes, 8 Phil. 620).
It may be observed in this
regard that novation is not one
of the means recognized by the
Penal Code whereby criminal
liability can be extinguished;
hence, the role of novation may
only be to either prevent the
rise of criminal habihty or to

cast doubt on the true nature

of
the
original
basic
transaction, whether or not it
was such that its breach would
not
give
rise
to
penal
responsibility, as when money
loaned is made to appear as a
deposit,
or
other
similar
disguise is resorted to (cf.
Abeto vs. People, 90 Phil. 581;
U.S. vs. Villareal, 27 Phil. 481).
In the case at bar, there is no dispute that
petitioners Guingona and Martin executed a
promissory note on June 17, 1981 assuming
the obligation of the bank to private
respondent
David;
while
the
criminal
complaint for estafa was filed on December
23, 1981 with the Office of the City Fiscal.
Hence, it is clear that novation occurred long
before the filing of the criminal complaint with
the Office of the City Fiscal.
Consequently, as aforestated, any incipient
criminal liability would be avoided but there
will still be a civil liability on the part of
petitioners Guingona and Martin to pay the
assumed obligation.
Petitioners herein were likewise charged with
violation of Section 3 of Central Bank Circular
No. 364 and other related regulations
regarding foreign exchange transactions by
accepting foreign currency deposit in the
amount of US$75,000.00 without authority
from the Central Bank. They contend
however, that the US dollars intended by
respondent David for deposit were all
converted into Philippine currency before
acceptance and deposit into Nation Savings
and Loan Association.

Petitioners' contention is worthy of behelf for

the following reasons:
1. It appears from the records that when
respondent David was about to make a
deposit of bank draft issued in his name in
the amount of US$50,000.00 with the Nation
Savings and Loan Association, the same had
to be cleared first and converted into
Philippine currency. Accordingly, the bank
draft was endorsed by respondent David to
petitioner Guingona, who in turn deposited it
to his dollar account with the Security Bank
and Trust Company. Petitioner Guingona
merely accommodated the request of the
Nation Savings and loan Association in order
to clear the bank draft through his dollar
account because the bank did not have a
dollar account. Immediately after the bank
draft was cleared, petitioner Guingona
authorized
Nation
Savings
and
Loan
Association to withdraw the same in order to
be utilized by the bank for its operations.
2. It is safe to assume that the U.S. dollars
were converted first into Philippine pesos
before they were accepted and deposited in
Nation Savings and Loan Association, because
the bank is presumed to have followed the
ordinary course of the business which is to
accept deposits in Philippine currency only,
and that the transaction was regular and fair,
in the absence of a clear and convincing
evidence
to
the
contrary
(see
paragraphs p and q,Sec. 5, Rule 131, Rules of
Court).
3. Respondent David has not denied the
aforesaid contention of herein petitioners
despite the fact that it was raised. in
petitioners' reply filed on May 7, 1982 to

private respondent's comment and in the July

27, 1982 reply to public respondents'
comment and reiterated in petitioners'
memorandum filed on October 30, 1982,
thereby adding more support to the
conclusion that the US$75,000.00 were really
converted into Philippine currency before they
were accepted and deposited into Nation
Savings and Loan Association. Considering
that this might adversely affect his case,
respondent David should have promptly
denied petitioners' allegation.
In conclusion, considering that the liability of
the petitioners is purely civil in nature and
that there is no clear showing that they
engaged in foreign exchange transactions,
We hold that the public respondents acted
without jurisdiction when they investigated
the
charges
against
the
petitioners.
Consequently, public respondents should be
restrained from further proceeding with the
criminal case for to allow the case to
continue, even if the petitioners could have
appealed to the Ministry of Justice, would
work great injustice to petitioners and would
render meaningless the proper administration
of justice.
While as a rule, the prosecution in a criminal
offense cannot be the subject of prohibition
and injunction, this court has recognized the
resort to the extraordinary writs of prohibition
and injunction in extreme cases, thus:t.
hqw
On the issue of whether a writ
of injunction can restrain the
proceedings in Criminal Case
No. 3140, the general rule is
that
"ordinarily,
criminal

prosecution
may
not
be
blocked by court prohibition or
injunction."
Exceptions,
however, are allowed in the
following
instances:t.
hqw
"1.
for
the
orderly
administration of
justice;
"2. to prevent
the use of the
strong arm of the
law
in
an
oppressive
and
vindictive
manner;
"3.
to
avoid
multiplicity
of
actions;
"4.
to
afford
adequate
protection
to
constitutional
rights;
"5.
in
proper
cases,
because
the statute relied
upon
is
unconstitutional
or
was
held
invalid"
( Primicias vs.
Municipality
of
Urdaneta,
Pangasinan,
93

SCRA 462, 469470

[1979];
citing Ramos vs.
Torres, 25 SCRA
557 [1968]; and
Hernandez
vs.
Albano, 19 SCRA
95, 96 [1967]).
Likewise, in Lopez vs. The City Judge, et
al. ( 18 SCRA 616, 621-622 [1966]), We held
that:t.hqw
The writs of certiorari and
prohibition, as extraordinary
legal remedies, are in the
ultimate analysis, intended to
annul void proceedings; to
prevent the unlawful and
oppressive exercise of legal
authority and to provide for a
fair and orderly administration
of justice. Thus, in Yu Kong Eng
vs. Trinidad, 47 Phil. 385, We
took cognizance of a petition
for certiorari and prohibition
although the accused in the
case could have appealed in
due time from the order
complained of, our action in the
premises being based on the
public
welfare
policy
the
advancement of public policy.
In Dimayuga vs. Fajardo, 43
Phil. 304, We also admitted a
petition
to
restrain
the
prosecution
of
certain
chiropractors
although,
if
convicted, they could have
appealed. We gave due course
to their petition for the orderly

administration of justice and to

avoid possible oppression by
the strong arm of the law. And
inArevalo vs. Nepomuceno, 63
Phil. 627, the petition for
certiorari challenging the trial
court's action admitting an
amended
information
was
sustained
despite
the
availability of appeal at the
proper time.
WHEREFORE, THE PETITION IS HEREBY
GRANTED; THE TEMPORARY RESTRAINING
ORDER PREVIOUSLY
ISSUED
IS MADE
PERMANENT. COSTS AGAINST THE PRIVATE
RESPONDENT.
SO ORDERED.1wph1.t
Concepcion, Jr., Guerrero, De Castro and
Escolin, JJ., concur.
Abad Santos, J., concur in the result.
Aquino, J., took no part.

G.R. No. 123498

2007

November 23,

BPI
FAMILY
BANK, Petitioner,
vs.
AMADO
FRANCO
and
COURT
OF
APPEALS, Respondents.
DECISION
NACHURA, J.:
Banks are exhorted to treat the accounts of
their depositors with meticulous care and
utmost fidelity. We reiterate this exhortation
in the case at bench.
Before us is a Petition for Review on Certiorari
seeking the reversal of the Court of Appeals
(CA) Decision1 in CA-G.R. CV No. 43424 which
affirmed with modification the judgment2 of
the Regional Trial Court, Branch 55, Manila
(Manila RTC), in Civil Case No. 90-53295.
This case has its genesis in an ostensible
fraud perpetrated on the petitioner BPI Family
Bank (BPI-FB) allegedly by respondent Amado
Franco (Franco) in conspiracy with other

individuals,3 some of whom opened and

maintained separate accounts with BPI-FB,
San Francisco del Monte (SFDM) branch, in a
series of transactions.
On August 15, 1989, Tevesteco ArrastreStevedoring Co., Inc. (Tevesteco) opened a
savings and current account with BPI-FB.
Soon thereafter, or on August 25, 1989, First
Metro Investment Corporation (FMIC) also
opened a time deposit account with the same
branch
of
BPI-FB
with
a
deposit
of P100,000,000.00, to mature one year
thence.
Subsequently, on August 31, 1989, Franco
opened
three
accounts,
namely,
a
current,4 savings,5 and time deposit,6 with
BPI-FB. The current and savings accounts
were respectively funded with an initial
deposit ofP500,000.00 each, while the time
deposit account had P1,000,000.00 with a
maturity date of August 31, 1990. The total
amount of P2,000,000.00 used to open these
accounts is traceable to a check issued by
Tevesteco allegedly in consideration of
Francos introduction of Eladio Teves, 7 who
was looking for a conduit bank to facilitate
Tevestecos business transactions, to Jaime
Sebastian, who was then BPI-FB SFDMs
Branch Manager. In turn, the funding for
the P2,000,000.00
check
was
part
of
the P80,000,000.00 debited by BPI-FB from
FMICs time deposit account and credited to
Tevestecos current account pursuant to an
Authority to Debit purportedly signed by
FMICs officers.
It appears, however, that the signatures of
FMICs officers on the Authority to Debit were
forged.8 On September 4, 1989, Antonio

Ong,9 upon being shown the Authority to

Debit, personally declared his signature
therein to be a forgery. Unfortunately,
Tevesteco had already effected several
withdrawals from its current account (to
which had been credited the P80,000,000.00
covered by the forged Authority to Debit)
amounting
to P37,455,410.54,
including
the P2,000,000.00 paid to Franco.
On September 8, 1989, impelled by the need
to protect its interests in light of FMICs
forgery claim, BPI-FB, thru its Senior VicePresident, Severino Coronacion, instructed
Jesus Arangorin10 to debit Francos savings
and current accounts for the amounts
remaining therein.11 However, Francos time
deposit account could not be debited due to
the
capacity
limitations
of
BPI-FBs
computer.12
In the meantime, two checks13 drawn by
Franco against his BPI-FB current account
were dishonored upon presentment for
payment, and stamped with a notation
"account under garnishment." Apparently,
Francos current account was garnished by
virtue of an Order of Attachment issued by
the Regional Trial Court of Makati (Makati RTC)
in Civil Case No. 89-4996 (Makati Case),
which had been filed by BPI-FB against Franco
et
al.,14 to
recover
the P37,455,410.54
representing Tevestecos total withdrawals
from its account.
Notably, the dishonored checks were issued
by Franco and presented for payment at BPIFB prior to Francos receipt of notice that his
accounts were under garnishment.15 In fact,
at the time the Notice of Garnishment dated
September 27, 1989 was served on BPI-FB,

Franco had yet to be impleaded in the Makati

case where the writ of attachment was
issued.
It was only on May 15, 1990, through the
service of a copy of the Second Amended
Complaint in Civil Case No. 89-4996, that
Franco was impleaded in the Makati
case.16 Immediately, upon receipt of such
copy, Franco filed a Motion to Discharge
Attachment which the Makati RTC granted on
May 16, 1990. The Order Lifting the Order of
Attachment was served on BPI-FB on even
date, with Franco demanding the release to
him of the funds in his savings and current
accounts. Jesus Arangorin, BPI-FBs new
manager, could not forthwith comply with the
demand as the funds, as previously stated,
had already been debited because of FMICs
forgery claim. As such, BPI-FBs computer at
the SFDM Branch indicated that the current
account record was "not on file."
With respect to Francos savings account, it
appears
that
Franco
agreed
to
an
arrangement, as a favor to Sebastian,
whereby P400,000.00
from
his
savings
account was temporarily transferred to
Domingo Quiaoits savings account, subject to
its immediate return upon issuance of a
certificate of deposit which Quiaoit needed in
connection with his visa application at the
Taiwan Embassy. As part of the arrangement,
Sebastian retained custody of Quiaoits
savings account passbook to ensure that no
withdrawal would be effected therefrom, and
to preserve Francos deposits.
On May 17, 1990, Franco pre-terminated his
time deposit account. BPI-FB deducted the
amount of P63,189.00 from the remaining

balance of the time deposit account

representing advance interest paid to him.
These transactions spawned a number of
cases, some of which we had already
resolved.
FMIC filed a complaint against BPI-FB for the
recovery of the amount of P80,000,000.00
debited
from
its
account.17 The
case
eventually reached this Court, and in BPI
Family Savings Bank, Inc. v. First Metro
Investment Corporation,18 we upheld the
finding of the courts below that BPI-FB failed
to exercise the degree of diligence required
by the nature of its obligation to treat the
accounts of its depositors with meticulous
care. Thus, BPI-FB was found liable to FMIC
for the debited amount in its time deposit. It
was ordered to pay P65,332,321.99 plus
interest at 17% per annum from August 29,
1989 until fully restored. In turn, the 17%
shall itself earn interest at 12% from October
4, 1989 until fully paid.
In a related case, Edgardo Buenaventura,
Myrna
Lizardo
and
Yolanda
Tica
(Buenaventura,
et
al.),19 recipients
of
a P500,000.00
check
proceeding
from
the P80,000,000.00 mistakenly credited to
Tevesteco, likewise filed suit. Buenaventura et
al., as in the case of Franco, were also
prevented from effecting withdrawals20 from
their current account with BPI-FB, Bonifacio
Market, Edsa, Caloocan City Branch. Likewise,
when the case was elevated to this Court
docketed
as
BPI
Family
Bank
v.
Buenaventura,21 we ruled that BPI-FB had no
right to freeze Buenaventura, et al.s
accounts and adjudged BPI-FB liable therefor,
in addition to damages.

Meanwhile, BPI-FB filed separate civil and

criminal cases against those believed to be
the perpetrators of the multi-million peso
scam.22 In the criminal case, Franco, along
with the other accused, except for Manuel
Bienvenida who was still at large, were
acquitted of the crime of Estafa as defined
and penalized under Article 351, par. 2(a) of
the Revised Penal Code.23 However, the civil
case24 remains under litigation and the
respective rights and liabilities of the parties
have yet to be adjudicated.
Consequently, in light of BPI-FBs refusal to
heed Francos demands to unfreeze his
accounts and release his deposits therein, the
latter filed on June 4, 1990 with the Manila
RTC the subject suit. In his complaint, Franco
prayed for the following reliefs: (1) the
interest on the remaining balance 25 of his
current account which was eventually
released to him on October 31, 1991; (2) the
balance26 on his savings account, plus interest
thereon; (3) the advance interest27 paid to
him which had been deducted when he preterminated his time deposit account; and (4)
the payment of actual, moral and exemplary
damages, as well as attorneys fees.
BPI-FB traversed this complaint, insisting that
it was correct in freezing the accounts of
Franco and refusing to release his deposits,
claiming that it had a better right to the
amounts which consisted of part of the
money allegedly fraudulently withdrawn from
it by Tevesteco and ending up in Francos
accounts. BPI-FB asseverated that the
claimed consideration of P2,000,000.00 for
the introduction facilitated by Franco between
George Daantos and Eladio Teves, on the one
hand, and Jaime Sebastian, on the other,

spoke volumes of Francos participation in the

fraudulent transaction.
On August 4, 1993, the Manila RTC rendered
judgment, the dispositive portion of which
reads as follows:
WHEREFORE, in view of all the foregoing,
judgment is hereby rendered in favor of
[Franco] and against [BPI-FB], ordering the
latter to pay to the former the following sums:
1. P76,500.00 representing the legal
rate of interest on the amount
of P450,000.00 from May 18, 1990 to
October 31, 1991;
2. P498,973.23
representing
the
balance on [Francos] savings account
as of May 18, 1990, together with the
interest thereon in accordance with
the banks guidelines on the payment
therefor;
3. P30,000.00 by way of attorneys
fees; and
4. P10,000.00 as nominal damages.
The counterclaim of the defendant is
DISMISSED for lack of factual and legal
anchor.
Costs against [BPI-FB].
SO ORDERED.28
Unsatisfied with the decision, both parties
filed their respective appeals before the CA.
Franco confined his appeal to the Manila

RTCs denial of his claim for moral and

exemplary damages, and the diminutive
award of attorneys fees. In affirming with
modification the lower courts decision, the
appellate court decreed, to wit:
WHEREFORE, foregoing considered, the
appealed decision is hereby AFFIRMED with
modification
ordering
[BPI-FB] to
pay
[Franco] P63,189.00 representing the interest
deducted from the time deposit of plaintiffappellant.P200,000.00 as moral damages
and P100,000.00 as exemplary damages,
deleting the award of nominal damages (in
view of the award of moral and exemplary
damages) and increasing the award of
attorneys
fees
from P30,000.00
to P75,000.00.
Cost against [BPI-FB].
SO ORDERED.29
In this recourse, BPI-FB ascribes error to the
CA when it ruled that: (1) Franco had a better
right to the deposits in the subject accounts
which are part of the proceeds of a forged
Authority to Debit; (2) Franco is entitled to
interest on his current account; (3) Franco can
recover the P400,000.00 deposit in Quiaoits
savings account; (4) the dishonor of Francos
checks was not legally in order; (5) BPI-FB is
liable for interest on Francos time deposit,
and for moral and exemplary damages; and
(6) BPI-FBs counter-claim has no factual and
legal anchor.
The petition is partly meritorious.
We are in full accord with the common ruling
of the lower courts that BPI-FB cannot

unilaterally freeze Francos accounts and

preclude him from withdrawing his deposits.
However, contrary to the appellate courts
ruling, we hold that Franco is not entitled to
unearned interest on the time deposit as well
as to moral and exemplary damages.
First. On the issue of who has a better right to
the deposits in Francos accounts, BPI-FB
urges us that the legal consequence of FMICs
forgery claim is that the money transferred by
BPI-FB to Tevesteco is its own, and
considering that it was able to recover
possession of the same when the money was
redeposited by Franco, it had the right to set
up its ownership thereon and freeze Francos
accounts.
BPI-FB contends that its position is not unlike
that of an owner of personal property who
regains possession after it is stolen, and to
illustrate this point, BPI-FB gives the following
example: where Xs television set is stolen by
Y who thereafter sells it to Z, and where Z
unwittingly entrusts possession of the TV set
to X, the latter would have the right to keep
possession of the property and preclude Z
from recovering possession thereof. To bolster
its position, BPI-FB cites Article 559 of the
Civil Code, which provides:
Article 559. The possession of movable
property acquired in good faith is equivalent
to a title. Nevertheless, one who has lost any
movable or has been unlawfully deprived
thereof, may recover it from the person in
possession of the same.
If the possessor of a movable lost or of which
the owner has been unlawfully deprived, has
acquired it in good faith at a public sale, the

owner cannot obtain its return

reimbursing the price paid therefor.

without

BPI-FBs argument is unsound. To begin with,

the movable property mentioned in Article
559 of the Civil Code pertains to a specific or
determinate thing.30 A determinate or specific
thing is one that is individualized and can be
identified or distinguished from others of the
same kind.31
In this case, the deposit in Francos accounts
consists of money which, albeit characterized
as a movable, is generic and fungible. 32 The
quality of being fungible depends upon the
possibility of the property, because of its
nature or the will of the parties, being
substituted by others of the same kind, not
having a distinct individuality.33
Significantly, while Article 559 permits an
owner who has lost or has been unlawfully
deprived of a movable to recover the exact
same thing from the current possessor, BPI-FB
simply claims ownership of the equivalent
amount of money, i.e., the value thereof,
which it had mistakenly debited from FMICs
account and credited to Tevestecos, and
subsequently traced to Francos account. In
fact, this is what BPI-FB did in filing the Makati
Case against Franco, et al. It staked its claim
on the money itself which passed from one
account to another, commencing with the
forged Authority to Debit.
It bears emphasizing that money bears no
earmarks of peculiar ownership,34 and this
characteristic is all the more manifest in the
instant case which involves money in a
banking transaction gone awry. Its primary
function is to pass from hand to hand as a

medium of exchange, without other evidence

of its title.35 Money, which had passed
through various transactions in the general
course of banking business, even if of
traceable origin, is no exception.
Thus, inasmuch as what is involved is not a
specific or determinate personal property,
BPI-FBs illustrative example, ostensibly
based on Article 559, is inapplicable to the
instant case.
There is no doubt that BPI-FB owns the
deposited monies in the accounts of Franco,
but not as a legal consequence of its
unauthorized transfer of FMICs deposits to
Tevestecos account. BPI-FB conveniently
forgets that the deposit of money in banks is
governed by the Civil Code provisions on
simple loan or mutuum.36 As there is a debtorcreditor relationship between a bank and its
depositor,
BPI-FB
ultimately
acquired
ownership of Francos deposits, but such
ownership is coupled with a corresponding
obligation to pay him an equal amount on
demand.37 Although BPI-FB owns the deposits
in Francos accounts, it cannot prevent him
from demanding payment of BPI-FBs
obligation by drawing checks against his
current account, or asking for the release of
the funds in his savings account. Thus, when
Franco issued checks drawn against his
current account, he had every right as
creditor to expect that those checks would be
honored by BPI-FB as debtor.
More importantly, BPI-FB does not have a
unilateral right to freeze the accounts of
Franco based on its mere suspicion that the
funds therein were proceeds of the multimillion peso scam Franco was allegedly

involved in. To grant BPI-FB, or any bank for

that matter, the right to take whatever action
it pleases on deposits which it supposes are
derived from shady transactions, would open
the floodgates of public distrust in the
banking industry.
Our pronouncement in Simex International
(Manila), Inc. v. Court of Appeals38 continues
to resonate, thus:
The banking system is an indispensable
institution in the modern world and plays a
vital role in the economic life of every
civilized nation. Whether as mere passive
entities for the safekeeping and saving of
money or as active instruments of business
and commerce, banks have become an
ubiquitous presence among the people, who
have come to regard them with respect and
even gratitude and, most of all, confidence.
Thus, even the humble wage-earner has not
hesitated to entrust his lifes savings to the
bank of his choice, knowing that they will be
safe in its custody and will even earn some
interest for him. The ordinary person, with
equal faith, usually maintains a modest
checking
account
for
security
and
convenience in the settling of his monthly
bills and the payment of ordinary expenses. x
x x.
In every case, the depositor expects the bank
to treat his account with the utmost fidelity,
whether such account consists only of a few
hundred pesos or of millions. The bank must
record every single transaction accurately,
down to the last centavo, and as promptly as
possible. This has to be done if the account is
to reflect at any given time the amount of
money the depositor can dispose of as he

sees fit, confident that the bank will deliver it

as and to whomever directs. A blunder on the
part of the bank, such as the dishonor of the
check without good reason, can cause the
depositor not a little embarrassment if not
also financial loss and perhaps even civil and
criminal litigation.
The point is that as a business affected with
public interest and because of the nature of
its functions, the bank is under obligation to
treat the accounts of its depositors with
meticulous care, always having in mind the
fiduciary nature of their relationship. x x x.
Ineluctably, BPI-FB, as the trustee in the
fiduciary relationship, is duty bound to know
the signatures of its customers. Having failed
to detect the forgery in the Authority to Debit
and in the process inadvertently facilitate the
FMIC-Tevesteco transfer, BPI-FB cannot now
shift liability thereon to Franco and the other
payees of checks issued by Tevesteco, or
prevent withdrawals from their respective
accounts without the appropriate court writ or
a favorable final judgment.
Further, it boggles the mind why BPI-FB, even
without delving into the authenticity of the
signature in the Authority to Debit, effected
the transfer of P80,000,000.00 from FMICs to
Tevestecos account, when FMICs account
was a time deposit and it had already paid
advance interest to FMIC. Considering that
there is as yet no indubitable evidence
establishing Francos participation in the
forgery, he remains an innocent party. As
between him and BPI-FB, the latter, which
made possible the present predicament, must
bear the resulting loss or inconvenience.

Second. With respect to its liability for interest

on Francos current account, BPI-FB argues
that its non-compliance with the Makati RTCs
Order Lifting the Order of Attachment and the
legal consequences thereof, is a matter that
ought to be taken up in that court.
The argument is tenuous. We agree with the
succinct holding of the appellate court in this
respect. The Manila RTCs order to pay
interests on Francos current account arose
from BPI-FBs unjustified refusal to comply
with its obligation to pay Franco pursuant to
their contract of mutuum. In other words,
from the time BPI-FB refused Francos
demand for the release of the deposits in his
current account, specifically, from May 17,
1990, interest at the rate of 12% began to
accrue thereon.39
Undeniably, the Makati RTC is vested with the
authority
to
determine
the
legal
consequences of BPI-FBs non-compliance
with the Order Lifting the Order of
Attachment. However, such authority does
not preclude the Manila RTC from ruling on
BPI-FBs liability to Franco for payment of
interest based on its continued and
unjustified refusal to perform a contractual
obligation upon demand. After all, this was
the core issue raised by Franco in his
complaint before the Manila RTC.
Third. As to the award to Franco of the
deposits in Quiaoits account, we find no
reason to depart from the factual findings of
both the Manila RTC and the CA.
Noteworthy is the fact that Quiaoit himself
testified that the deposits in his account are
actually owned by Franco who simply

accommodated Jaime Sebastians request to

temporarily
transfer P400,000.00
from
Francos savings account to Quiaoits
account.40 His
testimony
cannot
be
characterized as hearsay as the records
reveal that he had personal knowledge of the
arrangement
made
between
Franco,
Sebastian and himself.41
BPI-FB makes capital of Francos belated
allegation
relative
to
this
particular
arrangement. It insists that the transaction
with Quiaoit was not specifically alleged in
Francos complaint before the Manila RTC.
However, it appears that BPI-FB had impliedly
consented to the trial of this issue given its
extensive cross-examination of Quiaoit.
Section 5, Rule 10 of the Rules of Court
provides:
Section 5. Amendment to conform to or
authorize presentation of evidence. When
issues not raised by the pleadings are tried
with the express or implied consent of the
parties, they shall be treated in all respects as
if they had been raised in the pleadings. Such
amendment of the pleadings as may be
necessary to cause them to conform to the
evidence and to raise these issues may be
made upon motion of any party at any time,
even after judgment; but failure to amend
does not affect the result of the trial of these
issues. If evidence is objected to at the trial
on the ground that it is now within the issues
made by the pleadings, the court may allow
the pleadings to be amended and shall do so
with liberality if the presentation of the merits
of the action and the ends of substantial
justice will be subserved thereby. The court

may grant a continuance to enable the

amendment to be made. (Emphasis supplied)
In all, BPI-FBs argument that this case is not
the right forum for Franco to recover
the P400,000.00 begs the issue. To reiterate,
Quiaoit,
testifying
during
the
trial,
unequivocally disclaimed ownership of the
funds in his account, and pointed to Franco as
the actual owner thereof. Clearly, Francos
action for the recovery of his deposits
appropriately covers the deposits in Quiaoits
account.
Fourth. Notwithstanding all the foregoing, BPIFB continues to insist that the dishonor of
Francos
checks
respectively
dated
September 11 and 18, 1989 was legally in
order in view of the Makati RTCs
supplemental writ of attachment issued on
September 14, 1989. It posits that as the
party that applied for the writ of attachment
before the Makati RTC, it need not be served
with the Notice of Garnishment before it could
place Francos accounts under garnishment.
The argument is specious. In this argument,
we perceive BPI-FBs clever but transparent
ploy to circumvent Section 4, 42 Rule 13 of the
Rules of Court. It should be noted that the
strict requirement on service of court papers
upon the parties affected is designed to
comply with the elementary requisites of due
process. Franco was entitled, as a matter of
right, to notice, if the requirements of due
process are to be observed. Yet, he received a
copy of the Notice of Garnishment only on
September 27, 1989, several days after the
two checks he issued were dishonored by BPIFB on September 20 and 21, 1989. Verily, it
was premature for BPI-FB to freeze Francos

accounts without even awaiting service of the

Makati RTCs Notice of Garnishment on
Franco.
Additionally, it should be remembered that
the enforcement of a writ of attachment
cannot be made without including in the main
suit the owner of the property attached by
virtue thereof. Section 5, Rule 13 of the Rules
of Court specifically provides that "no levy or
attachment pursuant to the writ issued x x x
shall be enforced unless it is preceded, or
contemporaneously accompanied, by service
of summons, together with a copy of the
complaint, the application for attachment, on
the defendant within the Philippines."
Franco was impleaded as party-defendant
only on May 15, 1990. The Makati RTC had
yet to acquire jurisdiction over the person of
Franco
when
BPI-FB
garnished
his
accounts.43 Effectively, therefore, the Makati
RTC had no authority yet to bind the deposits
of Franco through the writ of attachment, and
consequently, there was no legal basis for
BPI-FB to dishonor the checks issued by
Franco.

exemplary damages, the CA attributed bad

faith to BPI-FB because it (1) completely
disregarded its obligation to Franco; (2)
misleadingly claimed that Francos deposits
were under garnishment; (3) misrepresented
that Francos current account was not on file;
and (4) refused to return the P400,000.00
despite the fact that the ostensible owner,
Quiaoit, wanted the amount returned to
Franco.
In this regard, we are guided by Article 2201
of the Civil Code which provides:
Article 2201. In contracts and quasi-contracts,
the damages for which the obligor who acted
in good faith is liable shall be those that are
the natural and probable consequences of the
breach of the obligation, and which the
parties have foreseen or could have
reasonable foreseen at the time the
obligation was constituted.
In case of fraud, bad faith, malice or wanton
attitude, the obligor shall be responsible for
all damages which may be reasonably
attributed to the non-performance of the
obligation. (Emphasis supplied.)

Fifth. Anent the CAs finding that BPI-FB was

in bad faith and as such liable for the advance
interest it deducted from Francos time
deposit account, and for moral as well as
exemplary damages, we find it proper to
reinstate the ruling of the trial court, and
allow only the recovery of nominal damages
in the amount of P10,000.00. However, we
retain the CAs award of P75,000.00 as
attorneys fees.

We find, as the trial court did, that BPI-FB

acted out of the impetus of self-protection
and not out of malevolence or ill will. BPI-FB
was not in the corrupt state of mind
contemplated in Article 2201 and should not
be held liable for all damages now being
imputed to it for its breach of obligation. For
the same reason, it is not liable for the
unearned interest on the time deposit.

In granting Francos prayer for interest on his

time deposit account and for moral and

Bad faith does not simply connote bad

judgment or negligence; it imports a

dishonest purpose or some moral obliquity

and conscious doing of wrong; it partakes of
the nature of fraud.44 We have held that it is a
breach of a known duty through some motive
of interest or ill will.45 In the instant case, we
cannot attribute to BPI-FB fraud or even a
motive of self-enrichment. As the trial court
found, there was no denial whatsoever by
BPI-FB of the existence of the accounts. The
computer-generated
document
which
indicated that the current account was "not
on file" resulted from the prior debit by BPI-FB
of the deposits. The remedy of freezing the
account, or the garnishment, or even the
outright refusal to honor any transaction
thereon was resorted to solely for the purpose
of holding on to the funds as a security for its
intended court action,46 and with no other
goal but to ensure the integrity of the
accounts.
We have had occasion to hold that in the
absence of fraud or bad faith,47 moral
damages cannot be awarded; and that the
adverse result of an action does not per se
make the action wrongful, or the party liable
for it. One may err, but error alone is not a
ground for granting such damages.48
An award of moral damages contemplates the
existence of the following requisites: (1) there
must be an injury clearly sustained by the
claimant, whether physical, mental or
psychological; (2) there must be a culpable
act or omission factually established; (3) the
wrongful act or omission of the defendant is
the proximate cause of the injury sustained
by the claimant; and (4) the award for
damages is predicated on any of the cases
stated in Article 2219 of the Civil Code.49

Franco could not point to, or identify any

particular circumstance in Article 2219 of the
Civil Code,50 upon which to base his claim for
moral damages.1wphi1
Thus, not having acted in bad faith, BPI-FB
cannot be held liable for moral damages
under Article 2220 of the Civil Code for
breach of contract.51
We also deny the claim for exemplary
damages. Franco should show that he is
entitled
to
moral,
temperate,
or
compensatory damages before the court may
even consider the question of whether
exemplary damages should be awarded to
him.52 As there is no basis for the award of
moral damages, neither can exemplary
damages be granted.
While it is a sound policy not to set a
premium on the right to litigate, 53 we,
however, find that Franco is entitled to
reasonable attorneys fees for having been
compelled to go to court in order to assert his
right. Thus, we affirm the CAs grant
of P75,000.00 as attorneys fees.
Attorneys fees may be awarded when a party
is compelled to litigate or incur expenses to
protect his interest,54or when the court deems
it just and equitable.55 In the case at bench,
BPI-FB refused to unfreeze the deposits of
Franco despite the Makati RTCs Order Lifting
the Order of Attachment and Quiaoits
unwavering assertion that the P400,000.00
was part of Francos savings account. This
refusal constrained Franco to incur expenses
and litigate for almost two (2) decades in
order to protect his interests and recover his
deposits. Therefore, this Court deems it just

and equitable to grant Franco P75,000.00 as

attorneys fees. The award is reasonable in
view of the complexity of the issues and the
time it has taken for this case to be
resolved.56
Sixth. As for the dismissal of BPI-FBs counterclaim, we uphold the Manila RTCs ruling, as
affirmed by the CA, that BPI-FB is not entitled
to recover P3,800,000.00 as actual damages.
BPI-FBs alleged loss of profit as a result of
Francos suit is, as already pointed out, of its
own making. Accordingly, the denial of its
counter-claim is in order.
WHEREFORE, the petition is PARTIALLY
GRANTED. The Court of Appeals Decision
dated November 29, 1995 is AFFIRMED with
the MODIFICATION that the award of
unearned interest on the time deposit and of
moral and exemplary damages is DELETED.
No pronouncement as to costs.
SO ORDERED.
ANTONIO
EDUARDO
Associate Justice

B.

NACHURA

fraudulent withdrawals from the latter s

account through an automated tellering
machine (ATM), we hereby resolve the issue
of liability against the bank because of the
intervention of a system bug that facilitated
the purported withdrawals.
The Case
Under review on certiorari is the decision
promulgated on August l, 2005,1 whereby the
Court of Appeals (CA) reversed the judgment
the Regional Trial Court, Branch 51, in Manila
(RTC) rendered in favor of the petitioner on
May 14, 1998 in Civil Case No. 9261706.2 Thereby,
the
CA relieved the
depositor of any liability for the supposedly
fraudulent withdrawals.
Antecedents

G.R. No. 170598

2013

October 9,

FAR
EAST
BANK
TRUST
COMPANY, Petitioner,
vs.
ROBERTO MAR CHANTE, a.k.a. ROBERT
MAR G. CHAN, Respondents.
DECISION
BERSAMIN, J.:
In this dispute between a. bank and its
depositor over liability for several supposedly

Robert Mar Chante, also known as Robert Mar

G. Chan (Chan), was a current account
depositor of petitioner Far East Bank & Trust
Co. (FEBTC) at its Ongpin Branch (Current
Account No. 5012-00340-3). FEBTC issued to
him Far East Card No. 05-01120-5-0 with July
1993 as the expiry date. The card, known as a
"Do-It-All" card to handle credit card and ATM
transactions, was tagged in his current
account. As a security feature, a personal
identification number (PIN), known only to
Chan as the depositor, was required in order
to gain access to the account. Upon the
cards issuance, FEBTC required him as the
depositor to key in the six-digit PIN. Thus,
with the use of his card and the PIN, he could
then deposit and withdraw funds from his
current account from any FEBTC ATM facility,
including the MEGALINK facilities of other

member banks that included the Philippine

National Bank (PNB).
Civil Case No. 92-61706 sprang from the
complaint brought by petitioner Far East Bank
& Trust Co. (FEBTC) on July 1, 1992 in the
RTC,3 to recover from Chan the principal sum
of P770,488.30 representing the unpaid
balance
of
the
amount
fraudulently
withdrawn from Chans Current Account No.
5012-00340-3 with the use of Far East Card
No. 05-01120-5-0.
FEBTC alleged that between 8:52 p.m. of May
4, 1992 and 4:06 a.m. of May 5, 1992, Chan
had used Far East Card No. 05-01120-5-0 to
withdraw funds totaling P967,000.00 from the
PNB-MEGALINK ATM facility at the Manila
Pavilion Hotel in Manila; that the withdrawals
were done in a series of 242 transactions with
the
use
of
the
same
machine,
at P4,000.00/withdrawal,
except
for
transaction No. 108 at 3:51 a.m. of May 5,
1992,
when
the
machine
dispensed
only P3,000.00; that MEGALINKS journal
tapes showed that Far East Card No. 0501120-5-0 had been used in all the 242
transactions; and that the transactions were
processed and recorded by the respective
computer systems of PNB and MEGALINK
despite the following circumstances, namely:
(a) the offline status of the branch of account
(FEBTC Ongpin Branch); (b) Chans account
balance being only P198,511.70 at the time,
as shown in the bank statement; (c) the
maximum withdrawal limit of the ATM facility
beingP50,000.00/day; and (d) his withdrawal
transactions not being reflected in his
account, and no debits or deductions from his
current account with the FEBTC Ongpin
Branch being recorded.

FEBTC added that at the time of the ATM

withdrawal transactions, there was an error in
its computer system known as "system bug"
whose nature had allowed Chan to
successfully withdraw funds in excess of his
current credit balance of P198,511.70; and
that Chan had taken advantage of the system
bug to do the withdrawal transactions.
On his part, Chan denied liability. Although
admitting his physical possession of Far East
Card No. 05-01120-5-0 on May 4 and May 5,
1992, he denied making the ATM withdrawals
totaling P967,000.00, and instead insisted
that he had been actually home at the time of
the withdrawals. He alluded to a possible
"inside job" as the cause of the supposed
withdrawals, citing a newspaper report to the
effect that an employee of FEBTCs had
admitted having debited accounts of its
depositors by using his knowledge of
computers as well as information available to
him. Chan claimed that it would be physically
impossible for any human being like him to
stand long hours in front of the ATM facility
just to withdraw funds. He contested the
debiting of his account, stating that the
debiting had affected his business and had
caused him to suffer great humiliation after
the dishonor of his sufficiently-funded checks
by FEBTC.
The records show that FEBTC discovered the
system
bug
only
after
its
routine
reconciliation
of
the
ATM-MEGALINK
transactions on May 7, 1992; that it
immediately adopted remedial and corrective
measures to protect its interest in order to
avoid incurring further damage as well as to
prevent a recurrence of the incident; that one
of the measures it adopted pursuant to its

ATM Service Agreement with Chan was to

program its computer system to repossess his
ATM card; that his ATM card was repossessed
at the Ermita Branch of FEBTC when he again
attempted to withdraw at the ATM facility
there; that the ATM facility retained his ATM
card until its recovery by the bank; and that
FEBTC conducted an in-depth investigation
and a time-and-motion study of the
withdrawals in question.
On May 14, 1992, FEBTC debited his current
account in the amount of P192,517.20
pursuant to Chans ATM Service Agreement. It
debited the further sum of P3,000.00 on May
18, 1992, leaving the unrecovered portion of
the funds allegedly withdrawn by him
at P770,488.30. Thus, on May 14 and May 18,
1992, FEBTC sent to Chan letters demanding
the reimbursement of the unrecovered
balance of P770,488.30, but he turned a deaf
ear to the demands, impelling it to bring this
case on July 1, 1992.4
Ruling of the RTC
As reflected in the pre-trial order of October
19, 1992, the issues to be resolved were,
firstly, whether or not Chan had himself
withdrawn the total sum of P967,000.00 with
the use of his Far East Card No. 05-01120-5-0
at the PNB-MEGALINK ATM facility; and,
secondly, if the answer to the first issue was
that he did, whether or not he was liable to
reimburse
to
FEBTC
the
amount
of P770,488.30 as actual damages, plus
interest.5
On May 14, 1998, the RTC rendered judgment
in favor of FEBTC, pertinently holding and
ruling as follows:6

In the instant case, what happened was that

the defendant who was at the U.N. Branch of
the PNB used his card. He entered his PIN to
have access to a withdrawal transaction from
his account in Far East Bank, Ongpin Branch.
However, after recognizing the card and went
to the path of his account it could not get a
signal to proceed with the transaction so it
proceeded to the other path who gave the
signal to go on and dispense money. But
there was a computer error as it did not only
dispense the money limit for the day buty it
continued to dispense a lot more until it
reached the amount of P967,000.00 which
took the defendant till the hours of the
morning to obtain. But defendant says he did
not use his card. He alleges that it could be
an inside job just like what happened to the
said bank which was published in the
newspaper wherein the bank employee
admitted having done the theft through his
knowledge of the computer. Could this be
true?
The Court opines that it is not far-fetched.
However why did this Court state that
plaintiffs cause of action will survive? The
action of the defendant after the incident
gave him away. Merely two days after the
heavy withdrawal, the defendant returned not
at the exact scene of the incident but at a
nearby branch which is also in Ermita and
tried again to withdraw. But at this time the
bank already knew what happened so it
blocked the card and retained it being a hot
card. The defendant was not successful this
time so what he did was to issue a check
almost for the whole amount of his balance in
his account leaving only a minimal amount.
This incident puzzles the Court. Maybe the
defendant was hoping that the machine

nearby may likewise dispense so much

amount without being detected. He will not
definitely go back to the U.N. branch as he
may think that it is being watched and so he
went to a nearby branch. Unfortunately, luck
was not with him this time and his card was
taken by the bank. The fact that he hastily
withdrew the balance of his account after his
card was retained by the bank only showed
his knowledge that the bank may debit his
account. It also showed his intent to do
something further other than first inquire why
his card was considered a hot card if he is
really innocent. When he went to the Ermita
branch to withdraw from the ATM booth he
was intending to withdraw not more
than P50,000.00 as it is the banks limit for
the day and if ever he needed a bigger
amount than P50,000.00 immediately he
should have gone to the branch for an over
the counter transaction but he did not do so
and instead issued a check for P190,000.00
dated May 7, 1992 and another check
for P5,000.00 dated May 13, 1992. To the
mind of the Court, to take advantage of a
computer error, to gain sudden and
undeserved amount of money should be
condemned in the strongest terms.
There are no available precedents in this case
regarding computer errors, but the Court feels
that defendant should be held liable for the
mistaken amount he was able to get from the
machine based on the following provisions of
the law.
Articles 19, 21, 22 and 23 of the Civil Code x
x x.
xxxx

There is likewise one point that the Court

would like to discuss about the allegation of
the defendant that it was impossible for him
to withdraw the money in such long period
and almost minute after minute. This Court
believes that money is the least of all, a
person may give priority in life. There are
many who would sacrifice a lot just to have
lots of it, so it would not be impossible for one
to take time, stand for several hours and just
enter some items in the computer if the
return would be something like a million or
close to a million. In fact, the effort exerted
was just peanuts compared to other
legitimate ways of earning a living as the only
capital or means used to obtain it was the
defendants loss of sleep and the time spent
in withdrawing the same. Moreover, though
the cause of action in this case may be the
erroneous dispensation of money due to
computer bug which is not of defendants
wrong doing, the Court sees that what was
wrong was the failure to return the amount in
excess of what was legally his. There is such a
thing as JUSTICE. Justice means rendering to
others their due. A person is just when he is
careful about respecting the rights of others,
and who knows too, how to claim what he
rightfully deserves as a consequence of
fulfilling his duties.
From the foregoing, the conclusion is manifest
that plaintiff is within its right in initiating the
instant suit, as defendants refusal to pay the
claim constitutes the cause of action for sum
of money.
xxxx
WHEREFORE, judgment is hereby rendered in
favor of the plaintiff Far East Bank and Trust

Company and against the defendant Robert

Mar Chante a.k.a. Robert Mar G. Chan
ordering the latter to pay the former the
following:
1. the amount of P770,488.30 as
actual damages representing the
unrecovered balance of the amounts
withdrawn by defendant;
2. interest of 24% per annum on the
actual damages from July 1, 1992, the
date of the filing of the complaint until
fully paid;
3. the amount of P100,000.00
exemplary damages;

as

4. the sum of P30,000.00 as and for

attorneys fees; and
5. the costs of the suit. Defendants
counterclaim is hereby dismissed for
lack of merit.
SO ORDERED.
Ruling of the CA
Chan appealed,7 assigning
errors to the RTC, to wit:

the

following

1. THE TRIAL COURT ERRED IN

HOLDING
DEFENDANT-APPELLANT
LIABLE
FOR
THE
ALLEGED
WITHDRAWAL
OF
THE
AMOUNT
OF P967,000.00 WITH INTEREST AT
THE RATE OF 24% PER ANNUM BASED
MERELY
ON
CONJECTURES
AND

SUSPICIONS NOT
SOLID EVIDENCE;

ESTABLISHED

BY

2. THE TRIAL COURT ERRED IN

AWARDING IN FAVOR OF APPELLEE
EXEMPLARY DAMAGES IN THE AMOUNT
OF P100,000.00
AND
ATTORNEYS
FEES IN THE AMOUNT OF P30,000.00;
3. THE TRIAL COURT ERRED IN NOT
ORDERING THE RESTITUTION OF THE
AMOUNT OFP196,521.30 ILLEGALLY
DEBITED
BY
APPELLEE
FROM
APPELLANTS ACCOUNT.
On August 1, 2005, the CA promulgated the
assailed decision, reversing the RTCs
judgment, to wit:
x x x. The issues really before us are issues of
contract application and issues of fact that
would
require
an
examination
and
appreciation of the evidence presented. The
first order therefore in our review of the trial
courts decision is to take stock of the
established and undisputed facts, and of the
evidence the parties have presented. We say
this at the outset as we believe that it was in
this respect that the lower court failed in its
consideration and appreciation of the case.
xxxx
An evidentiary dilemma we face in this case
is the fact that there is no direct evidence on
the issue of who made the actual
withdrawals. Chan correctly claims that the
bank failed to present any witness testifying
that he (Chan) made the actual withdrawals.
At the same time, Chan can only rely on his
own uncorroborated testimony that he was at

home on the night that withdrawals were

made. We recognize that the bank can claim
that no other evidence of actual withdrawal is
necessary because the PIN unique to Chan is
already evidence that only Chan or his
authorized representative and none other
could have accessed his account. But at the
same time, we cannot close our eyes to the
fact that computers and the ATM system is
not perfect as shown by an incident cited by
Chan involving the FEBTC itself. Aside from
the vulnerability to inside staff members, we
take judicial notice that no less than our own
Central Bank has publicly warned banks
about other nefarious schemes involving ATM
machines. In a March 7, 2003 letter, the
Central Bank stated:
March 7, 2003

In light of the absence of conclusive direct

evidence of actual withdrawal that we can
rely upon, we have to depend on evidence
"other than direct" to reach verdict in this
case.
xxxx
WHEREFORE , premises considered, we
hereby GRANT the appeal and accordingly
REVERSE and SET ASIDE the Decision dated
May 14, 1998 of the Regional Trial Court of
Manila, Branch 51, in Civil Case No. 92-61706.
We accordingly ORDER plaintiff-appellee Far
East Bank and Trust Company (FEBTC) to
return to Chan the amount of Php196,571.30
plus 12% interest per annum computed from
August 7, 1992 the time Chan filed his
counterclaim until the obligation is satisfied.
Costs against the plaintiff-appellee FEBTC.

BSP CIRCULAR LETTER

SO ORDERED.8
TO : All Banks
SUBJECT : Technology Fraud on ATM Systems
Please be advised that there were incidents in
other countries regarding technology fraud in
ATM systems perpetrated by unscrupulous
individuals and/ or syndicates.

Issues

1. A specialized scanner attached to

the ATM card slot, and;

Hence, FEBTC has appealed, urging the

reversal of the CAs adverse decision, and
praying that Chan be held liable for the
withdrawals made from his account on May 4
and May 5, 1992; and that it should not be
held liable to return to Chan the sum
of P196,571.30 debited from his account.

2. A pinhole camera

Ruling

These acts are carried out by:

xxxx

FEBTC moved for reconsideration, but the CA

denied its motion on November 24, 2005.9

The appeal lacks merit.

FEBTC would want us to hold that Chan had

authored the May 4 and May 5, 1992 ATM
withdrawals based on the following attendant
factors, namely: (a) ATM transactions were
processed and identified by the PIN, among
others; (b) the PIN was exclusive and known
only to the account holder; (c) the ATM was
tagged in the cardholders account where the
ATM transactions were debited or credited;
(d) the account number tagged in the ATM
card identified the cardholder; (e) the ATM
withdrawals were documented transactions;
and (f) the transactions were strictly
monitored and recorded not only by FEBTC as
the bank of account but also by the ATM
machine and MEGALINK. In other words, the
ATM transactions in question would not be
processed unless the PIN, which was known
only to Chan as the cardholder, had been
correctly entered, an indication both that it
was his ATM card that had been used, and
that all the transactions had been processed
successfully by the PNB-MEGALINK ATM
facility at the Manila Pavilion Hotel with the
use of the correct PIN.
We disagree with FEBTC.
Although there was no question that Chan
had the physical possession of Far East Card
No. 05-01120-5-0 at the time of the
withdrawals, the exclusive possession of the
card alone did not suffice to preponderantly
establish that he had himself made the
withdrawals, or that he had caused the
withdrawals to be made. In his answer, he
denied using the card to withdraw funds from
his account on the dates in question, and
averred that the withdrawals had been an
"inside job." His denial effectively traversed
FEBTCs claim of his direct and personal

liability for the withdrawals, that it would lose

the case unless it competently and
sufficiently established that he had personally
made the withdrawals himself, or that he had
caused the withdrawals. In other words, it
carried the burden of proof.
Burden of proof is a term that refers to two
separate and quite different concepts,
namely: (a) the risk of non-persuasion, or the
burden of persuasion, or simply persuasion
burden; and (b) the duty of producing
evidence, or the burden of going forward with
the evidence, or simply the production burden
or the burden of evidence.10 In its first
concept, it is the duty to establish the truth of
a given proposition or issue by such a
quantum of evidence as the law demands in
the case at which the issue arises. 11 In its
other concept, it is the duty of producing
evidence at the beginning or at any
subsequent stage of trial in order to make or
meet a prima facie case. Generally speaking,
burden of proof in its second concept passes
from party to party as the case progresses,
while in its first concept it rests throughout
upon the party asserting the affirmative of
the issue.12
The party who alleges an affirmative fact has
the burden of proving it because mere
allegation of the fact is not evidence of
it.13 Verily, the party who asserts, not he who
denies, must prove.14
In civil cases, the burden of proof is on the
party who would be defeated if no evidence is
given on either side.15This is because our
system frees the trier of facts from the
responsibility of investigating and presenting
the facts and arguments, placing that

responsibility entirely upon the respective

parties.16 The burden of proof, which may
either be on the plaintiff or the defendant, is
on the plaintiff if the defendant denies the
factual allegations of the complaint in the
manner required by the Rules of Court; or on
the defendant if he admits expressly or
impliedly the essential allegations but raises
an affirmative defense or defenses, that, if
proved, would exculpate him from liability.17
Section 1, Rule 133 of the Rules of Court sets
the quantum of evidence for civil actions, and
delineates how preponderance of evidence is
determined, viz :
Section 1. In civil cases, the party having the
burden of proof must establish his case by a
preponderance of evidence. In determining
where the preponderance or superior weight
of evidence on the issues involved lies, the
court may consider all the facts and
circumstances of the case, the witnesses
manner of testifying, their intelligence, their
means and opportunity of knowing the facts
to which they are testifying, the nature of the
facts to which they testify, the probability or
improbability of their testimony, their interest
or want of interest, and also their personal
credibility so far as the same may legitimately
appear upon the trial. The court may also
consider the number of witnesses, though the
preponderance is not necessarily with the
greater number. (Emphasis supplied)
As the rule indicates, preponderant evidence
refers to evidence that is of greater weight, or
more convincing, than the evidence offered in
opposition to it.18 It is proof that leads the
trier of facts to find that the existence of the

contested fact is more probable than its

nonexistence.19
Being the plaintiff, FEBTC must rely on the
strength of its own evidence instead of upon
the weakness of Chans evidence. Its burden
of proof thus required it to preponderantly
demonstrate that his ATM card had been used
to make the withdrawals, and that he had
used the ATM card and PIN by himself or by
another person to make the fraudulent
withdrawals. Otherwise, it could not recover
from him any funds supposedly improperly
withdrawn from the ATM account. We remind
that as a banking institution, FEBTC had the
duty and responsibility to ensure the safety of
the funds it held in trust for its depositors. It
could not avoid the duty or evade the
responsibility because it alone should bear
the price for the fraud resulting from the
system bug on account of its exclusive control
of its computer system.
Did FEBTC discharge its burden of proof?
The CA ruled that FEBTC did not because
After a review of the records of this case, we
find the totality of evidence submitted by
FEBTC insufficient to establish the crucial
facts that would justify a judgment in its
favor.
To our mind, the fact that Chans account
number and ATM card number were the ones
used for the withdrawals, by itself, is not
sufficient to support the conclusion that he
should be deemed to have made the
withdrawals.

FEBTC offers in this regard the PNB ATMs

journal tapes to prove the withdrawals and
their details the time of the transactions;
the account number used; the ATM card
number; and the amount withdrawn and at
the same time declared that these tapes are
authentic
and
genuine.
These
tapes,
however, are not as reliable as FEBTC
represented them to be as they are not even
internally consistent. A disturbing internal
discrepancy we note relates to the amounts
reflected as "ledger balance" and "available
balance". We find it strange that for every
4,000.00 pesos allegedly withdrawn by Chan,
the available balance increased rather than
diminished. Worse, the amount of available
balance as reflected in the tapes was way
above the actual available balance of less
than Php200,000.00 that Chans current
account had at that time. These discrepancies
must inevitably reflect on the integrity of the
journal tapes; the proven inconsistencies in
some aspects of these tapes leave the other
aspects suspect and uncertain.
But more than this, we are not convinced that
the tapes lead us to the inevitable conclusion
that Chans card, rather than a replacement
card containing Chans PIN and card number
or some other equivalent scheme, was used.
To our mind, we cannot discount this
possibility given the available technology
making computer fraud a possibility, the cited
instances of computer security breaches, the
admitted system bug, and most notably
the fact that the withdrawals were made
under circumstances that took advantage of
the system bug. System errors of this kind,
when taken advantage of to the extent that
had happened in this case, are planned for.
Indeed, prior preparation must take place to

avoid suspicion and attention where the

withdrawal was made for seven (7) long hours
in a place frequented by hundreds of guests,
over 242 transactions where the physical
volume of the money withdrawn was not
insignificant. To say that this was done by the
owner of the account based solely on the
records of the transactions, is a convenient
but not a convincing explanation.20
In our view, the CAs ruling was correct.
To start with, Edgar Munarriz, FEBTCs very
own Systems Analyst, admitted that the bug
infecting the banks computer system had
facilitated the fraudulent withdrawals. 21 This
admission impelled the CA to thoroughly
dissect the situation in order to determine the
consequences of the intervention of the
system bug in FEBTCs computer system. It
ultimately determined thusly:
Significantly, FEBTC made the admission that
there was a program bug in its computer
system. To digress, computers are run based
on specific pre-arranged instructions or
"programs" that act on data or information
that computer users input. Computers can
only process these inputted data or
information according to the installed
programs. Thus, computers are as efficient,
as accurate and as convenient to use as the
instructions in their installed programs. They
can count, sort, compute and arrive at
decisions but they do so only and strictly in
accordance with the programs that make
them work. To cite an easy example, a
computer can be programmed to sort a stack
of cards prepared by male and female clients,
into male and female stacks, respectively. To
do this, the computer will first scan a card

and look at the place ("a field") where the

male/female information can be found. This
information may be in an appropriate box
which the bank client checks or shades to
indicate if he/she is male or female. The
computer will check if the box beside the
word "Female" is shaded. If it is, it will send
the card to the "Female" bin. If the box beside
the "male" is shaded, it will send the card to
the "Male" bin. If both the squares are shaded
or none is shaded or the card cannot be read,
it will send the card to the "Unknown" bin.
This way, the female cards and the male
cards can be sorted efficiently. However, the
program instructions can be written in such a
way that the computer can only make two
decisions, that is, if the Female box is shaded,
then the card goes to the "Female" bin;
otherwise, the card goes to the "Male" bin. In
this program, all the Female cards will be
sorted correctly but the Male bin will contain
all the other cards, that is, the Male cards, the
cards with no shading at all, and all the other
cards that cannot be classified.
The imperfect results arose from the
imperfect program instructions or from a
program "bug". Something very close to this
example happened in the present case.
According to the testimony of the FEBTCs
systems analyst, there were two computer
programs that were involved in the
transactions: CAPDROTH and SCPUP 900.
CAPDROTH is the program that validates if
the account exists in the FEBTC files, if the
transaction is valid, and if the branch where
the account is maintained is ON-LINE (i.e.
continuously sending data). When the Chan
transaction entered the system, it was
validated by CAPDROTH which, on seeing that

the FEBTC-Ongpin branch was off-line,

returned a decision code passing on the
decision to authorize the transaction to the
SCPUP 900, another module. However, SCPUP
900 was not expecting this type of response
or decision code. As the SCPUP 900 program
was originally written, it will send back an
error message and abort a requested
transaction if it receives an error message
from any other module; otherwise, it will send
a message authorizing the transaction. In
other words, SCPUP 900 had only two
decisions to make: check if the message is an
error message, if not then, authorize. Since
what it received in the disputed transactions
were not error messages and were not also
authorizations, it sent back authorization
messages allowing the cash withdrawals. It
kept on sending authorization messages for
the 242 cash withdrawal transactions made
from Chans account between the evening of
May 4 and early morning of May 5, 1992. This
program bug was the reason the 242 cash
withdrawals were allowed by the PNB ATMMegalink machine.
The program bug occurred because of the
simultaneous presence of three conditions
that allowed it to happen: (1) the withdrawal
transactions involved a current account; (2)
the current account was with a branch that at
that time was off-line; and (3) the transaction
originated from MEGALINK (i.e., through
MEGALINK through a member bank other
than FEBTC). Because of the bug, Chans
account was not accessed at the time of the
transactions so that withdrawals in excess of
what the account contained were allowed.
Additionally, FEBTCs rule that only a
maximum withdrawable amount per day (in
the present case P50,000.00 per day) can be

made from an ATM account, was by-passed.

Thus, 242 withdrawals were made over an
eight hour period, in the total amount
ofP967,000.00.22
Secondly, the RTCs deductions on the cause
of the withdrawals were faulty. In holding
against Chan, the RTC chiefly relied on
inferences drawn from his acts subsequent to
the series of withdrawals, specifically his
attempt to withdraw funds from his account
at an FEBTC ATM facility in Ermita, Manila
barely two days after the questioned
withdrawals; his issuance of a check
for P190,000.00
immediately
after
the
capture of his ATM card by the ATM facility;
his failure to immediately report the capture
of his ATM card to FEBTC; and his going to
FEBTC only after the dishonor of the check he
had issued following the freezing of his
account. The inferences were not warranted,
however, because the subsequent acts would
not
persuasively
establish
his
actual
participation in the withdrawals due to their
being
actually
susceptible
of
other
interpretations consistent with his innocence.
We join the CAs observation that Chans
subsequent acts "could have been impelled
by so many reasons and motivations, and
cannot simply be given the meaning that the
lower court attributed to them," and, instead,
were even consistent with the purpose and
nature of his maintaining the current account
deposit with FEBTC, rendering the acts "not
unusual nor illegal."23 Although he was
expected to forthwith bring his cards capture
to FEBTCs attention, that he did not do so
could have other plausible explanations
consistent with good faith, among them his
being constantly occupied as a businessman

to attend to the multifarious activities of his

business. He might have also honestly
believed that he still had the sufficient funds
in his current account, as borne out by his
issuance of a check instead after the capture
of the card so as not for him to undermine
any financial obligation then becoming due.
Nor should his opting to withdraw funds from
his account at the ATM facility in Ermita in
less than two days after the questioned
withdrawals manifest responsibility on his
part, for he could also be properly presumed
to be then still unaware of the situation
involving his account. We note that his
letters24 written in response to FEBTCs
written demands to him disclosed honest
intentions rather than malice.
Thirdly, the RTC ignored the likelihood that
somebody other than Chan familiar with the
bug infection of FEBTCs computer system at
the time of the withdrawals and adept with
the workings of the computer system had
committed the fraud. This likelihood was not
far-fetched considering that FEBTC had
immediately adopted corrective measures
upon its discovery of the system bug, by
which FEBTC admitted its negligence in
ensuring an error-free computer system; and
that the system bug had affected only the
account of Chan.25 Truly, the trial court
misapprehended the extent to which the
system bug had made the computer system
of FEBTC stumble in serious error.
Fourthly, and perhaps the most damaging
lapse, was that FEBTC failed to establish that
the PNB-MEGALINKs ATM facility at the
Manila Pavilion Hotel had actually dispensed
cash in the very significantly large amount
alleged during the series of questioned

withdrawals. For sure, FEBTC should have

proved the actual dispensing of funds from
the ATM facility as the factual basis for its
claim against Chan. It did require PNB to
furnish a validated showing of the exact level
of cash then carried by the latters ATM
facility in the Manila Pavilion Hotel on May 4,
1992.26 Yet, when PNB employee Erwin
Arellano stood as a witness for FEBTC, he
confirmed the authenticity of the journal
tapes that had recorded Chans May 4 and
May 5, 1992 supposed ATM transactions but
did not categorically state how much funds
PNB-MEGALINKs ATM facility at the Manila
Pavilion Hotel had exactly carried at the time
of the withdrawals, particularly the amounts
immediately preceding and immediately
following the series of withdrawals. The
omission left a yawning gap in the evidence
against Chan.
And lastly, Chans allegation of an "inside job"
accounting for the anomalous withdrawals
should not be quickly dismissed as unworthy
of credence or weight. FEBTC employee
Manuel Del Castillo, another witness for
FEBTC, revealed that FEBTC had previously
encountered problems of bank accounts
being debited despite the absence of any
withdrawal transactions by their owners. He
attributed the problems to the erroneous
tagging of the affected accounts as
somebody elses account, allowing the latter
to withdraw from the affected accounts with
the use of the latters own ATM card, and to
the formers account being debited. 27 The
revelation of Del Castillo tended to support
Chans denial of liability, as it showed the
possibility of withdrawals being made by
another person despite the PIN being an

exclusive access number known only to the

cardholder.28
It is true that Del Castillo also declared that
FEBTC did not store the PINs of its clients
ATM cards.1wphi1 However, he mentioned
that FEBTC had stored the opposite numbers
corresponding to the PINs, which meant that
the PINs did not remain entirely irretrievable
at all times and in all cases by any of its
officers or employees with access to the
banks computer system. Accordingly, Del
Castillos assertion that the PINs were
rendered useless upon being entered in the
banks computer system did not entirely
disclose how the information on the PINs of
the depositors was stored or discarded as to
become useless for any purpose.
In view of the foregoing, FEBTC did not
present preponderant evidence proving
Chans liability for the supposedly fraudulent
withdrawals. It thus failed in discharging its
burden of persuasion.
WHEREFORE, the Court AFFIRMS the decision
of the Court of Appeals; and DIRECTS the
petitioner to pay the costs of suit.
SO ORDERED.
LUCAS
Associate Justice

P.

BERSAMIN

G.R. No. L-47757

April 7, 1942

ANA
RIVERA, plaintiff-appellant,
vs.
PEOPLES
BANK
AND
TRUST
CO., defendant-appellee.
MINNIE STEPHENSON, in her capacity as
administratix of the intestate estate of
EDGAR Stephenson,intervenor-appellee.
Cecilio I. Lim, Chief Public Defender, for
appellant.
Antonio M. Opisso for intervenor-appellee.
No appearance for appellee Peoples Bank &
Trust Co.
OZAETA, J.:
The question raised in this appeal is the
validity of the survivorship agreement made
by and between Edgar Stephenson, now
deceased, and Ana Rivera, appellant herein,
which read as follows:
SURVIVORSHIP AGREEMENT
Know All Men by These Presents:

That we hereby agree with each other

and with the PEOPLES BANK AND
TRUST COMPANY, Manila, Philippine
Islands (hereinafter called the Bank),
that all moneys now or hereafter
deposited by us or either of us with
the Bank in our savings account shall
be deposited in and received by the
Bank with the understanding and upon
the condition that said money be
deposited without consideration of its
previous ownership, and that said
money and all interest thereon, if any
there be, shall be the property of both
of us joint tenants, and shall be
payable to and collectible by either of
us during our joint lives, and after the
death of one of us shall belong to and
be the sole property of the survivor,
and shall be payable to and collectible
by such survivor.
And we further covenant and agree
with each other and the Bank, its
successors or assigns, that the receipt
or check of either of us during our joint
lives, or the receipt or check of the
survivor, for any payment made from
this account, and shall be valid and
sufficient and discharge to the Bank
for such payment.
The Bank is hereby authorized to
accept and deposit to this account all
checks made payable to either or both
of us, when endorsed by either or both
of us or one for the other.
This is a joint and several agreement
and is binding upon each of us, our
heirs, executors, administrators, and
assigns.

In witness whereof we have signed our

names here to this 17th day of
October, 1931.

(Sgd.)
EDGAR
(Sgd.)
Ana
Address: 799 Sta. Mesa, Manila

STEPHENSON
Rivera

Witness:
(Sgd.) FRED W. BOHLER
(Sgd.)
Y.
E.
Cox
S. A. #4146
Ana Rivera was employed by Edgar
Stephenson as housekeeper from the year
1920 until his death on June 8, 1939. On
December 24, Stephenson opened an
account in his name with the defendant
Peoples Bank by depositing therein the sum
of P1,000. On October 17, 1931, when there
was a balance of P2,072 in said account, the
survivorship agreement in question was
executed and the said account was
transferred to the name of "Edgar Stephenson
and/or Ana Rivera." At the time of
Stephenson's death Ana Rivera held the
deposit book, and there was a balance in said
account of P701. 43, which Ana Rivera
claimed but which the bank refused to pay to
her upon advice of its attorneys who gave the
opinion that the survivorship agreement was
of doubtful validity. Thereupon Ana Rivera
instituted the present action against the
bank, and Minnie Stephenson, administratix
of the estate of the deceased, intervened and
claimed the amount for the estate, alleging
that the money deposited in said account was
and is the exclusive property of the deceased.

The trial court held that the agreement in

question, viewed from its effect during the
lives of the parties, was a mere power of
attorney authorizing Ana Rivera to withdraw
the deposit, which power terminated upon the
death of the principal, Edgar Stephenson; but
that, viewed from its effect after the death of
either of the parties, the agreement was a
donation mortis causa with reference to the
balance remaining at the death of one of
them, which, not having been executed with
the formalities of a testamentary disposition
as required by article 620 of the Civil Code,
was of no legal effect.
The defendant bank did not appear in this
Court. Counsel for the intervenor-appellee in
his brief contends that the survivorship
agreement was a donation mortis causa from
Stephenson to Ana Rivera of the bank
account in question and that, since it was not
executed with the formalities of a will, it can
have no legal effect.
We find no basis for the conclusion that the
survivorship agreement was a mere power of
attorney from Stephenson to Ana Rivera, or
that it is a gift mortis causa of the bank
account in question from him to her. Such
conclusion is evidently predicated on the
assumption that Stephenson was the
exclusive owner of the funds deposited in the
bank, which assumption was in turn based on
the facts (1) that the account was originally
opened in the name of Stephenson alone and
(2) that Ana Rivera "served only as
housemaid of the deceased." But it not
infrequently happens that a person deposits
money in the bank in the name of another;
and in the instant case it also appears that
Ana Rivera served her master for about
nineteen years without actually receiving her
salary from him. The fact that subsequently
Stephenson transferred the account to the

name of himself and/or Ana Rivera and

executed with the latter the survivorship
agreement in question although there was no
relation of kinship between them but only
that of master and servant, nullifies the
assumption that Stephenson was the
exclusive owner of the bank account. In the
absence, then, of clear proof of the contrary,
we must give full faith and credit to the
certificate of deposit, which recites in effect
that the funds in question belonged to Edgar
Stephenson and Ana Rivera; that they were
joint owners thereof; and that either of them
could withdraw any part or the whole of said
account during the lifetime of both, and the
balance, if any, upon the death of either,
belonged to the survivor.
Is the survivorship agreement valid? Prima
facie, we think it is valid. It is an aleatory
contract supported by
law
a lawful
consideration the mutual agreement of the
joint depositors permitting either of them to
withdraw the whole deposit during their
lifetime, and transferring the balance to the
survivor upon the death of one of them. The
trial court said that the Civil Code "contains
no provisions sanctioning such an agreement"
We think it is covered by article 1790 of the
Civil Code, which provides as follows:
ART. 1790. By an aleatory contract one
of the parties binds himself, or both
reciprocally bind themselves, to give
or to do something as an equivalent
for that which the other party is to
give or do in case of the occurrence of
an event which is uncertain or will
happen at an indeterminate time.
(See also article 1255.)
The case of Macam vs. Gatmaitan (decided
March 11, 1937), 36 Off. Gaz., 2175, is in

point. Two friends Juana Gatmaitan and

Leonarda Macam, who had lived together for
some time, agreed in writing that the house
of strong materials which they bought with
the money belonging to Leonarda Macam and
the Buick automobile and certain furniture
which belonged to Juana Gatmaitan shall
belong to the survivor upon the death of one
of them and that "this agreement shall be
equivalent to a transfer of the rights of the
one who dies first and shall be kept by the
survivor." After the death of Leonarda Macam,
her executrix assailed that document on the
ground that with respect to the house the
same constituted a donation mortis causa by
Leonarda Macam in favor of Juana Gatmaitan.
In affirming the judgment of the trial court
absolving the defendants from the complaint
this Court, speaking through Chief Justice
Avacea, said:
This court is of the opinion that Exhibit
C is an aleatory contract whereby,
according to article 1790 of the civil
Code, one of the parties or both
reciprocally bind themselves to give or
do something as an equivalent for that
which the other party is to give or do
in case of the occurrence of an event
which is uncertain or will happen at an
indeterminate time. As already stated,
Leonarda was the owner of the house
and Juana of the Buick automobile and
most of the furniture. By virtue of
Exhibit C, Juana would become the
owner of the house in case Leonarda
died first, and Leonarda would become
the owner of the automobile and the
furniture if Juana were to die first. In
this manner Leonarda and Juana
reciprocally assigned their respective
property to one another conditioned
upon who might die first, the time of
death determining the event upon

which the acquisition of such right by

the one or the other depended. This
contract, as any other contract, is
binding upon the parties thereto.
Inasmuch as Leonarda had died before
Juana, the latter thereupon acquired
the ownership of the house, in the
same manner as Leonarda would have
acquired the ownership of the
automobile of the furniture if Juana
had died first. (36 Off. Gaz., 2176.)
Furthermore, "it is well established that a
bank account may be so created that two
persons shall be joint owners thereof during
their mutual lives, and the survivor take the
whole on the death of the other. The right to
make such joint deposits has generally been
held not to be done with by statutes
abolishing joint tenancy and survivorship
generally as they existed at common law." (7
Am. Jur., 299.)
But although the survivorship agreement
is per se not contrary to law, its operation or
effect may be violative of the law. For
instance, if it be shown in a given case that
such agreement is a mere cloak to hide an
inofficious donation, to transfer property in
fraud of creditors, or to defeat the legitime of
a forced heir, it may be assailed and annulled
upon such grounds. No such vice has been
imputed
and
established
against
the
agreement involved in the case.
The agreement appealed from is reversed
and another judgment will be entered in favor
of the plaintiff ordering the defendant bank to
pay to her the sum of P701.43, with legal
interest thereon from the date of the
complaint, and the costs in both instances. So
ordered.

Yulo, C.J.,
JJ., concur.

Moran,

Paras,

and

Bocobo,

G.R. No. 82027 March 29, 1990

ROMARICO
G.
VITUG, petitioner,
vs.
THE HONORABLE COURT OF APPEALS
and
ROWENA
FAUSTINOCORONA, respondents.
Rufino B. Javier Law Office for petitioner.
Quisumbing, Torres & Evangelista for private
respondent.

executrix. In our said decision, we upheld the

appointment of Nenita Alonte as co-special
administrator of Mrs. Vitug's estate with her
(Mrs. Vitug's) widower, petitioner Romarico G.
Vitug, pending probate.
On January 13, 1985, Romarico G. Vitug filed
a motion asking for authority from the
probate court to sell certain shares of stock
and real properties belonging to the estate to
cover allegedly his advances to the estate in
the sum of P667,731.66, plus interests, which
he claimed were personal funds. As found by
the Court of Appeals, 2the alleged advances
consisted of P58,147.40 spent for the
payment of estate tax, P518,834.27 as
deficiency estate tax, and P90,749.99 as
"increment thereto." 3 According to Mr. Vitug,
he withdrew the sums of P518,834.27 and
P90,749.99 from savings account No. 35342038 of the Bank of America, Makati, Metro
Manila.
On April 12, 1985, Rowena Corona opposed
the motion to sell on the ground that the
same funds withdrawn from savings account
No. 35342-038 were conjugal partnership
properties and part of the estate, and hence,
there
was
allegedly
no
ground
for
reimbursement. She also sought his ouster for
failure to include the sums in question for
inventory and for "concealment of funds
belonging to the estate." 4

SARMIENTO, J.:
This case is a chapter in an earlier suit
decided by this Court 1 involving the probate
of the two wills of the late Dolores Luchangco
Vitug, who died in New York, U. S.A., on
November
10,
1980,
naming
private
respondent
Rowena
Faustino-Corona

Vitug insists that the said funds are his

exclusive property having acquired the same
through a survivorship agreement executed
with his late wife and the bank on June 19,
1970. The agreement provides:

We hereby agree with each

other and with the BANK OF
AMERICAN NATIONAL TRUST
AND SAVINGS ASSOCIATION
(hereinafter referred to as the
BANK), that all money now or
hereafter deposited by us or
any or either of us with the
BANK in our joint savings
current account shall be the
property of all or both of us and
shall be payable to and
collectible or withdrawable by
either or any of us during our
lifetime, and after the death of
either or any of us shall belong
to and be the sole property of
the survivor or survivors, and
shall be payable to and
collectible or withdrawable by
such survivor or survivors.
We further agree with each
other and the BANK that the
receipt or check of either, any
or all of us during our lifetime,
or the receipt or check of the
survivor or survivors, for any
payment or withdrawal made
for
our
above-mentioned
account shall be valid and
sufficient release and discharge
of the BANK for such payment
or withdrawal. 5
The trial courts 6 upheld the validity of this
agreement and granted "the motion to sell
some of the estate of Dolores L. Vitug, the
proceeds of which shall be used to pay the
personal funds of Romarico Vitug in the total
sum of P667,731.66 ... ."7

On the other hand, the Court of Appeals, in

the petition for certiorari filed by the herein
private respondent, held that the abovequoted survivorship agreement constitutes a
conveyance mortis causa which "did not
comply with the formalities of a valid will as
prescribed by Article 805 of the Civil
Code," 8 and secondly, assuming that it is a
mere donation inter vivos, it is a prohibited
donation under the provisions of Article 133
of the Civil Code. 9
The dispositive portion of the decision of the
Court of Appeals states:
WHEREFORE, the order of
respondent
Judge
dated
November 26, 1985 (Annex II,
petition) is hereby set aside
insofar as it granted private
respondent's motion to sell
certain properties of the estate
of
Dolores
L.
Vitug
for
reimbursement of his alleged
advances to the estate, but the
same order is sustained in all
other respects. In addition,
respondent Judge is directed to
include
provisionally
the
deposits in Savings Account No.
35342-038 with the Bank of
America,
Makati,
in
the
inventory of actual properties
possessed by the spouses at
the time of the decedent's
death. With costs against
private respondent. 10
In his petition, Vitug, the surviving spouse,
assails the appellate court's ruling on the
strength of our decisions inRivera v. People's

Bank
and
Trust
Co. 11 and Macam
v.
12
Gatmaitan in which we sustained the
validity of "survivorship agreements" and
considering them as aleatory contracts. 13
The petition is meritorious.
The conveyance in question is not, first of all,
one of mortis causa, which should be
embodied in a will. A will has been defined as
"a personal, solemn, revocable and free act
by which a capacitated person disposes of his
property and rights and declares or complies
with duties to take effect after his
death." 14 In other words, the bequest or
device must pertain to the testator. 15 In this
case, the monies subject of savings account
No. 35342-038 were in the nature of conjugal
funds In the case relied on, Rivera v. People's
Bank and Trust Co., 16 we rejected claims that
a survivorship agreement purports to deliver
one party's separate properties in favor of the
other, but simply, their joint holdings:
xxx xxx xxx
... Such conclusion is evidently
predicated on the assumption
that
Stephenson
was the
exclusive owner of the fundsdeposited in the bank, which
assumption was in turn based
on the facts (1) that the
account was originally opened
in the name of Stephenson
alone and (2) that Ana Rivera
"served only as housemaid of
the deceased." But it not
infrequently happens that a
person deposits money in the
bank in the name of another;

and in the instant case it also

appears that Ana Rivera served
her master for about nineteen
years without actually receiving
her salary from him. The fact
that subsequently Stephenson
transferred the account to the
name of himself and/or Ana
Rivera and executed with the
latter
the
survivorship
agreement
in
question
although there was no relation
of kinship between them but
only that of master and
servant,
nullifies
the
assumption that Stephenson
was the exclusive owner of the
bank account. In the absence,
then, of clear proof to the
contrary, we must give full faith
and credit to the certificate of
deposit which recites in effect
that the funds in question
belonged to Edgar Stephenson
and Ana Rivera; that they were
joint (and several) owners
thereof; and that either of them
could withdraw any part or the
whole of said account during
the lifetime of both, and the
balance, if any, upon the death
of either, belonged to the
survivor. 17
xxx xxx xxx
In Macam v. Gatmaitan,

18

xxx xxx xxx

it was held:

This Court is of the opinion that

Exhibit C is an aleatory contract
whereby, according to article
1790 of the Civil Code, one of
the parties or both reciprocally
bind themselves to give or do
something as an equivalent for
that which the other party is to
give or do in case of the
occurrence of an event which is
uncertain or will happen at an
indeterminate time. As already
stated, Leonarda was the
owner of the house and Juana
of the Buick automobile and
most of the furniture. By virtue
of Exhibit C, Juana would
become the owner of the house
in case Leonarda died first, and
Leonarda would become the
owner of the automobile and
the furniture if Juana were to
die first. In this manner
Leonarda and Juana reciprocally
assigned
their
respective
property
to
one
another
conditioned upon who might
die first, the time of death
determining the event upon
which the acquisition of such
right by the one or the other
depended. This contract, as
any other contract, is binding
upon
the parties thereto.
Inasmuch as Leonarda had died
before
Juana,
the
latter
thereupon
acquired
the
ownership of the house, in the
same manner as Leonarda
would
have
acquired
the
ownership of the automobile

and of the furniture if Juana had

died first. 19
xxx xxx xxx
There is no showing that the funds exclusively
belonged to one party, and hence it must be
presumed to be conjugal, having been
acquired during the existence of the marita.
relations. 20
Neither is the survivorship agreement a
donation inter vivos, for obvious reasons,
because it was to take effect after the death
of one party. Secondly, it is not a donation
between the spouses because it involved no
conveyance of a spouse's own properties to
the other.
It is also our opinion that the agreement
involves no modification petition of the
conjugal partnership, as held by the Court of
Appeals, 21 by "mere stipulation" 22 and that it
is no "cloak" 23 to circumvent the law on
conjugal property relations. Certainly, the
spouses are not prohibited by law to invest
conjugal property, say, by way of a joint and
several bank account, more commonly
denominated in banking parlance as an
"and/or" account. In the case at bar, when the
spouses Vitug opened savings account No.
35342-038, they merely put what rightfully
belonged to them in a money-making
venture. They did not dispose of it in favor of
the other, which would have arguably been
sanctionable as a prohibited donation. And
since the funds were conjugal, it can not be
said that one spouse could have pressured
the other in placing his or her deposits in the
money pool.

The validity of the contract seems debatable

by reason of its "survivor-take-all" feature, but
in reality, that contract imposed a mere
obligation with a term, the term being death.
Such agreements are permitted by the Civil
Code.24
Under Article 2010 of the Code:
ART. 2010. By an aleatory
contract, one of the parties or
both
reciprocally
bind
themselves to give or to do
something in consideration of
what the other shall give or do
upon the happening of an
event which is uncertain, or
which is to occur at an
indeterminate time.
Under the
aforequoted
provision,
the
fulfillment of an aleatory contract depends on
either the happening of an event which is (1)
"uncertain," (2) "which is to occur at an
indeterminate
time."
A
survivorship
agreement, the sale of a sweepstake ticket, a
transaction stipulating on the value of
currency, and insurance have been held to
fall under the first category, while a contract
for life annuity or pension under Article
2021, et sequentia, has been categorized
under the second. 25 In either case, the
element of risk is present. In the case at bar,
the risk was the death of one party and
survivorship of the other.
However, as we have warned:
xxx xxx xxx

But although the survivorship

agreement is per se not
contrary to law its operation or
effect may be violative of the
law. For instance, if it be shown
in a given case that such
agreement is a mere cloak to
hide an inofficious donation, to
transfer property in fraud of
creditors, or to defeat the
legitime of a forced heir, it may
be assailed and annulled upon
such grounds. No such vice has
been imputed and established
against the agreement involved
in this case. 26

resolution, dated February 9, 1988, are SET

ASIDE.
No costs.
SO ORDERED.

xxx xxx xxx

There is no demonstration here that the
survivorship agreement had been executed
for such unlawful purposes, or, as held by the
respondent court, in order to frustrate our
laws on wills, donations, and conjugal
partnership.
The conclusion is accordingly unavoidable
that Mrs. Vitug having predeceased her
husband, the latter has acquired upon her
death a vested right over the amounts under
savings account No. 35342-038 of the Bank of
America. Insofar as the respondent court
ordered their inclusion in the inventory of
assets left by Mrs. Vitug, we hold that the
court was in error. Being the separate
property of petitioner, it forms no more part
of the estate of the deceased.
WHEREFORE, the decision of the respondent
appellate court, dated June 29, 1987, and its

G.R. No. L-53955 January 13, 1989

THE
MANILA
BANKING
CORPORATION, plaintiff-appellee,
vs.
ANASTACIO TEODORO, JR. and GRACE
ANNA TEODORO, defendants-appellants.
Formoso & Quimbo Law Office for plaintiffappellee.
Serafin P. Rivera for defendants-appellants.

BIDIN, J.:
This is an appeal from the decision* of the
Court of First Instance of Manila, Branch XVII

in Civil Case No. 78178 for collection of sum

of money based on promissory notes
executed by the defendants-appellants in
favor
of
plaintiff-appellee
bank.
The
dispositive portion of the appealed decision
(Record on Appeal, p. 33) reads as follows:
WHEREFORE
judgment
is
hereby rendered (a) sentencing
defendants, Anastacio Teodoro,
Jr. and Grace Anna Teodoro
jointly and severally, to pay
plaintiff the sum of P15,037.11
plus 12% interest per annum
from September 30, 1969 until
fully paid, in payment of
Promissory Notes No. 11487,
plus the sum of P1,000.00 as
attorney's
fees;
and
(b)
sentencing
defendant
Anastacio Teodoro, Jr. to pay
plaintiff the sum of P8,934.74,
plus interest at 12% per annum
from September 30, 1969 until
fully paid, in payment of
Promissory Notes Nos. 11515
and 11699, plus the sum of
P500.00 an attorney's fees.
With Costs against defendants.
The facts of the case as found by the trial
court are as follows:
On April 25, 1966, defendants,
together
with
Anastacio
Teodoro,
Sr.,
jointly
and
severally, executed in favor of
plaintiff a Promissory Note (No.
11487)
for
the
sum
of
P10,420.00 payable in 120

days, or on August 25, 1966, at

12%
interest
per
annum.
Defendants failed to pay the
said amount inspire of repeated
demands and the obligation as
of September 30, 1969 stood at
P 15,137.11 including accrued
interest and service charge.
On May 3, 1966 and June 20,
1966, defendants Anastacio
Teodoro,
Sr.
(Father)
and
Anastacio Teodoro, Jr. (Son)
executed in favor of plaintiff
two Promissory Notes (Nos.
11515
and
11699)
for
P8,000.00
and
P1,000.00
respectively, payable in 120
days at 12% interest per
annum. Father and Son made a
partial payment on the May 3,
1966 promissory Note but none
on
the
June
20,
1966
Promissory Note, leaving still
an unpaid balance of P8,934.74
as of September 30, 1969
including accrued interest and
service charge.
The three Promissory Notes
stipulated that any interest due
if not paid at the end of every
month shall be added to the
total amount then due, the
whole amount to bear interest
at the rate of 12% per annum
until fully paid; and in case of
collection through an attorneyat-law, the makers shall, jointly
and severally, pay 10% of the
amount over-due as attorney's

fees, which in no case shall be

leas than P200.00.
It appears that on January 24,
1964, the Son executed in favor
of
plaintiff
a
Deed
of
Assignment
of
Receivables
from
the
Emergency
Employment Administration in
the sum of P44,635.00. The
Deed of Assignment provided
that it was for and in
consideration of certain credits,
loans, overdrafts and other
credit
accommodations
extended to defendants as
security for the payment of said
sum and the interest thereon,
and that defendants do hereby
remise, release and quitclaim
all its rights, title, and interest
in
and
to
the
accounts
receivables. Further.
(1) The title and
right
of
possession
to
said
accounts
receivable is to
remain in the
assignee, and it
shall have the
right to collect
the same from
the debtor, and
whatsoever the
Assignor does in
connection with
the collection of
said accounts, it
agrees to do as

agent
and
representative of
the Assignee and
in trust for said
Assignee ;

enforcing
any
rights against the
debtors of the
assigned
accounts
receivable
and
will pay upon
demand,
the
entire
unpaid
balance of said
contract in the
event of nonpayment by the
said debtors of
any monthly sum
at its due date or
of
any
other
default by said
debtors;

xxx xxx xxx

(6) The Assignor
guarantees
the
existence
and
legality of said
accounts
receivable, and
the
due
and
punctual
payment thereof
unto
the
assignee, ... on
demand, ... and
further,
that
Assignor
warrants
the
solvency
and
credit worthiness
of
each
and
every account.
(7) The Assignor
does
hereby
guarantee
the
payment
when
due on all sums
payable
under
the
contracts
giving rise to the
accounts
receivable
...
including
reasonable
attorney's fees in

xxx xxx xxx

(9)
...
This
Assignment shall
also stand as a
continuing
guarantee
for
any
and
all
whatsoever there
is or in the future
there
will
be
justly owing from
the Assignor to
the Assignee ...
In their stipulations of Fact, it is
admitted by the parties that
plaintiff extended loans to
defendants on the basis and by
reason of certain contracts
entered into by the defunct

Emergency
Employment
Administration
(EEA)
with
defendants for the fabrication
of fishing boats, and that the
Philippine Fisheries Commission
succeeded the EEA after its
abolition; that non-payment of
the notes was due to the failure
of the Commission to pay
defendants after the latter had
complied with their contractual
obligations;
and
that
the
President of plaintiff Bank took
steps to collect from the
Commission, but no collection
was effected.
For failure of defendants to pay
the
sums
due
on
the
Promissory Note, this action
was instituted on November 13,
1969, originally against the
Father, Son, and the latter's
wife. Because the Father died,
however, during the pendency
of the suit, the case as against
him was dismiss under the
provisions of Section 21, Rule 3
of the Rules of Court. The
action,
then
is
against
defendants Son and his wife for
the collection of the sum of P
15,037.11 on Promissory Note
No.
14487;
and
against
defendant Son for the recovery
of P 8,394.7.4 on Promissory
Notes Nos. 11515 and 11699,
plus interest on both amounts
at 12% per annum from
September 30, 1969 until fully

paid, and 10% of the amounts

due as attorney's fees.
Neither
of
the
parties
presented
any
testimonial
evidence and submitted the
case for decision based on their
Stipulations of Fact and on
then, documentary evidence.
The issues, as defined by the
parties are: (1) whether or not
plaintiff
claim
is
already
considered paid by the Deed of
Assign.
judgment
of
Receivables by the Son; and (2)
whether or not it is plaintiff who
should
directly
sue
the
Philippine Fisheries Commission
for collection.' (Record on
Appeal, p. 29- 32).
On April 17, 1972, the trial court rendered its
judgment adverse to defendants. On June 8,
1972, defendants filed a motion for
reconsideration (Record on Appeal, p. 33)
which was denied by the trial court in its
order of June 14, 1972 (Record on Appeal, p.
37). On June 23, 1972, defendants filed with
the lower court their notice of appeal
together with the appeal bond (Record on
Appeal, p. 38). The record of appeal was
forwarded to the Court of Appeals on August
22, 1972 (Record on Appeal, p. 42).
In their appeal (Brief for the Appellants, Rollo,
p. 12), appellants raised a single assignment
of error, that is
THAT
THE
DECISION
IN
QUESTION AMOUNTS TO A

JUDICIAL REMAKING OF THE

CONTRACT
BETWEEN
THE
PARTIES, IN VIOLATION OF LAW;
HENCE, TANTAMOUNT TO LACK
OR EXCESS OF JURISDICTION.
As the appeal involves a pure question of law,
the Court of Appeals, in its resolution
promulgated on March 6, 1980, certified the
case to this Court (Rollo, p. 24). The record on
Appeal was forwarded to this Court on March
31, 1980 (Rollo, p. 1).
In the resolution of May 30, 1980, the First
Division of this Court ordered that the case be
docketed and declared submitted for decision
(Rollo, p. 33).
On March 7, 1988, considering the length of
time that the case has been pending with the
Court and to determine whether supervening
events may have rendered the case moot and
academic, the Court resolved (1) to require
the parties to MOVE IN THE PREMISES within
thirty days from notice, and in case they fail
to make the proper manifestation within the
required period, (2) to consider the case
terminated and closed with the entry of
judgment accordingly made thereon (Rollo, p.
40).
On April 27, 1988, appellee moved for a
resolution of the appeal review interposed by
defendants-appellants (Rollo, p. 41).
The major issues raised in this case are as
follows: (1) whether or not the assignment of
receivables has the effect of payment of all
the loans contracted by appellants from
appellee bank; and (2) whether or not
appellee bank must first exhaust all legal

remedies against the Philippine Fisheries

Commission before it can proceed against
appellants for collections of loan under the
promissory notes which are plaintiffs bases in
the action for collection in Civil Case No.
78178.
Assignment of credit is an agreement by
virtue of which the owner of a credit, known
as the assignor, by a legal cause, such as
sale, dation in payment, exchange or
donation, and without the need of the
consent of the debtor, transfers his credit and
its accessory rights to another, known as the
assignee, who acquires the power to enforce
it to the same extent as the assignor could
have enforced it against the debtor. ... It may
be in the form of a sale, but at times it may
constitute a dation in payment, such as when
a debtor, in order to obtain a release from his
debt, assigns to his creditor a credit he has
against a third person, or it may constitute a
donation as when it is by gratuitous title; or it
may even be merely by way of guaranty, as
when the creditor gives as a collateral, to
secure his own debt in favor of the assignee,
without
transmitting
ownership.
The
character that it may assume determines its
requisites and effects. its regulation, and the
capacity of the parties to execute it; and in
every case, the obligations between assignor
and assignee will depend upon the judicial
relation which is the basis of the assignment:
(Tolentino, Commentaries and Jurisprudence
on the Civil Code of the Philippines, Vol. 5, pp.
165-166).
There is no question as to the validity of the
assignment of receivables executed by
appellants in favor of appellee bank.

The issue is with regard to its legal effects.

I
It is evident that the assignment of
receivables executed by appellants on
January 24, 1964 did not transfer the
ownership of the receivables to appellee bank
and release appellants from their loans with
the bank incurred under promissory notes
Nos. 11487,11515 and 11699.
The Deed of Assignment provided that it was
for and in consideration of certain credits,
loans,
overdrafts,
and
their
credit
accommodations in the sum of P10,000.00
extended to appellants by appellee bank, and
as security for the payment of said sum and
the interest thereon; that appellants as
assignors, remise, release, and quitclaim to
assignee bank all their rights, title and
interest in and to the accounts receivable
assigned (lst paragraph). It was further
stipulated that the assignment will also stand
as a continuing guaranty for future loans of
appellants
to
appellee
bank
and
correspondingly the assignment shall also
extend to all the accounts receivable;
appellants shall also obtain in the future, until
the consideration on the loans secured by
appellants from appellee bank shall have
been fully paid by them (No. 9).
The position of appellants, however, is that
the deed of assignment is a quitclaim in
consideration of their indebtedness to
appellee bank, not mere guaranty, in view of
the following provisions of the deed of
assignment:

...
the
Assignor
do
hereby remise, release and
quit-claim unto said assignee
all
its rights,
title
and
interest in
the
accounts
receivable
described
hereunder. (Emphasis supplied
by appellants, first par., Deed
of Assignment).
... that the title and right of
possession to said account
receivable is to remain in said
assignee and it shall have
the right to collect directly from
the debtor, and whatever the
Assignor does in connection
with the collection of said
accounts, it agrees to do so
as agent and representative of
the Assignee and it trust for
said Assignee ...(Ibid. par. 2 of
Deed of Assignment).' (Record
on Appeal, p. 27)
The character of the transactions between
the parties is not, however, determined by
the language used in the document but by
their intention. Thus, the Court, quoting from
the American Jurisprudence (68 2d, Secured
Transaction, Section 50) said:
The
characters
of
the
transaction between the parties
is to be determined by their
intention, regardless of what
language was used or what the
form of the transfer was. If it
was intended to secure the
payment of money, it must be
construed
as
a
pledge.

However,
even
though
a
transfer, if regarded by itself,
appellate
to
have
been
absolute,
its
object
and
character
might
still
be
qualified and explained by a
contemporaneous
writing
declaring it to have been a
deposit of the property as
collateral security. It has been
Id that a transfer of property by
the debtor to a creditor, even if
sufficient on its farm to make
an
absolute
conveyance,
should be treated as a pledge if
the debt continues in existence
and is not discharged by the
transfer, and that accordingly,
the use of the terms ordinarily
exporting
conveyance,
of
absolute ownership will not be
given that effect in such a
transaction if they are also
commonly used in pledges and
mortgages and therefore do not
unqualifiedly indicate a transfer
of absolute ownership, in the
absence
of
clear
and
ambiguous language or other
circumstances excluding an
intent to pledge. (Lopez v.
Court of Appeals, 114 SCRA
671 [1982]).
Definitely, the assignment of the receivables
did not result from a sale transaction. It
cannot be said to have been constituted by
virtue of a dation in payment for appellants'
loans with the bank evidenced by promissory
note Nos. 11487, 11515 and 11699 which are
the subject of the suit for collection in Civil

Case No. 78178. At the time the deed of

assignment was executed, said loans were
non-existent yet. The deed of assignment was
executed on January 24, 1964 (Exh. "G"),
while promissory note No. 11487 is dated
April 25, 1966 (Exh. 'A), promissory note
11515, dated May 3, 1966 (Exh. 'B'),
promissory note 11699, on June 20, 1966
(Exh. "C"). At most, it was a dation in
payment for P10,000.00, the amount of credit
from appellee bank indicated in the deed of
assignment. At the time the assignment was
executed, there was no obligation to be
extinguished
except
the
amount
of
P10,000.00. Moreover, in order that an
obligation may be extinguished by another
which substitutes the same, it is imperative
that it be so declared in unequivocal terms, or
that the old and the new obligations be on
every point incompatible with each other
(Article 1292, New Civil Code).
Obviously, the deed of assignment was
intended as collateral security for the bank
loans of appellants, as a continuing guaranty
for whatever sums would be owing by
defendants to plaintiff, as stated in stipulation
No. 9 of the deed.
In case of doubt as to whether a transaction
is a pledge or a dation in payment, the
presumption is in favor of pledge, the latter
being the lesser transmission of rights and
interests (Lopez v. Court of Appeals, supra).
In one case, the assignments of rights, title
and interest of the defendant in the contracts
of lease of two buildings as well as her rights,
title and interest in the land on which the
buildings were constructed to secure an
overdraft from a bank amounting to

P110,000.00
which
was
increased
to
P150,000.00, then to P165,000.00 was
considered by the Court to be documents of
mortgage contracts inasmuch as they were
executed
to
guarantee
the
principal
obligations of the defendant consisting of the
overdrafts or the indebtedness resulting
therefrom.
The
Court
ruled
that
an
assignment to guarantee an obligation is in
effect a mortgage and not an absolute
conveyance of title which confers ownership
on the assignee (People's Bank & Trust Co. v.
Odom, 64 Phil. 126 [1937]).
II
As to whether or not appellee bank must have
to exhaust all legal remedies against the
Philippine Fisheries Commission before it can
proceed against appellants for collection of
loans under their promissory notes, must also
be answered in the negative.
The obligation of appellants under the
promissory notes not having been released by
the assignment of receivables, appellants
remain as the principal debtors of appellee
bank rather than mere guarantors. The deed
of assignment merely guarantees said
obligations. That the guarantor cannot be
compelled to pay the creditor unless the
latter has exhausted all the property of the
debtor, and has resorted to all the legal
remedies against the debtor, under Article
2058 of the New Civil Code does not therefore
apply to them. It is of course of the essence
of a contract of pledge or mortgage that
when the principal obligation becomes due,
the things in which the pledge or mortgage
consists may be alienated for the payment to
the creditor (Article 2087, New Civil Code). In

the instant case, appellants are both the

principal debtors and the pledgors or
mortgagors. Resort to one is, therefore, resort
to the other.
Appellee bank did try to collect on the
pledged receivables. As the Emergency
Employment Agency (EEA) which issued the
receivables had been abolished, the collection
had to be coursed through the Office of the
President which disapproved the same
(Record on Appeal, p. 16). The receivable
became virtually worthless leaving appellants'
loans from appellee bank unsecured. It is but
proper that after their repeated demands
made on appellants for the settlement of their
obligations, appellee bank should proceed
against appellants. It would be an exercise in
futility to proceed against a defunct office for
the collection of the receivables pledged.
WHEREFORE, the appeal is Dismissed for lack
of merit and the appealed decision of the trial
court is affirmed in toto.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr. and Cortes, JJ.,
concur.

Separate Opinions

FELICIANO, J., concurring:

I quite agree with the general reasoning of
and the results reached by my distinguished
brother Bidin in respect of both of the
principal issues he addressed in his opinion.
I would merely wish to add a few lines in
respect of the point made by Bidin, J., that
"the character of the transactions between
the parties is not, however, determined by
the language used in the document but by
their intention.' This statement is basically
not exceptionable, so far as it goes. It might,
however, be borne in mind that the intent of
the parties to the transaction is to be
determined in the first instance, by the very
language which they use. The deed of
assignment contains language which suggest
that the parties intended to effect a complete
alienation of title to and rights over the
receivables which are the subject of the
assignment. This language is comprised of
works like "remise," "release and quitclaim"
and clauses like "the title and right of
possession to said accounts receivable is to
remain in said assignee" who "shall have the
right to collect directly from the debtor." The
same intent is also suggested by the use of
the words "agent and representative of the
assignee" in reffering to the assignor.
The point that appears to me to be worth
making is that although in its form, the deed
of assignment of receivables partakes of the
nature of a complete alienation of the
receivables assigned, such form should be
taken in conjunction with, and indeed must be
qualified and controlled by, other language
showing an intent of the parties that title to
the receivables shall pass to the assignee for

the limited
purpose of securing
another,
principal; obligation owed by the assignor to
the assignee. Title moves from assignor to
asignee but that title is defeasible being
designed to collateralize the principal
obligation. Operationally, what this means is
that the assignee is burdened with an
obligation of taking the proceeds of the
receivables assigned and applying such
proceeds to the satisfaction of the principal
obligation
and
returning
any
balance
remaining thereafter to the assignor.
The parties gave the deed of assignment the
form of an absolute conveyance of title over
the receivables assigned, essentially for the
convenience of the assignee. Without such
formally unlimited conveyance of title, the
assignee would have to treat the deed of
assignment as no more than a deed of pledge
or of chattel mortgage. In other words, in
such hypothetical case, should the assignee
seek to realize upon the security given to him
through the deed of assignment (which would
then have to comply with the documentation
and registration requirements of a pledge or
chattel mortgage), the assignee would have
to foreclose upon the securities or credits
assigned and place them on public sale and
there acquire the same. It should be recalled
that under the principle which forbids
a pactum commisorium Article 2088, Civil
Code), a mortgagee or pledgee is prohibited
from simply taking and appropriating the
personal property turned over to him as
security for the payment of a principal
obligation. A deed of assignment by way of
security avoids the necessity of a public sale
impose by the rule on pactum commisorium,
by in effect placing the sale of the collateral
up front. (Emphasis supplied)

The foregoing is applicable where, as in the

present instance, the deed of assignment of
receivables combines elements of both a
complete or absolute alienation of the credits
being assigned and a security arrangement to
assure payment of a principal obligation.
Where the second element is absent, that is,
where there is nothing to indicate that the
parties intended the deed of assignment to
function as a security device, it would of
course follow that the simple absolute
conveyance embodied in the deed of
assignment
would
be
operative;
the
assignment would constitute essentially a
mode of payment or dacion en pago. Put a
little differently, in order that a deed of
assignment of receivables which is in form an
absolute conveyance of title to the credits
being assigned, may be qualified and treated
as a security arrangement, language to such
effect must be found in the document itself
and that language, precisely, is embodied in
the deed of assignment in the instant case.
Finally, it might be noted that that deed
simply follows a form in standard use in
commercial banking.
Separate Opinions
FELICIANO, J., concurring:
I quite agree with the general reasoning of
and the results reached by my distinguished
brother Bidin in respect of both of the
principal issues he addressed in his opinion.
I would merely wish to add a few lines in
respect of the point made by Bidin, J., that
"the character of the transactions between
the parties is not, however, determined by
the language used in the document but by

their intention.' This statement is basically

not exceptionable, so far as it goes. It might,
however, be borne in mind that the intent of
the parties to the transaction is to be
determined in the first instance, by the very
language which they use. The deed of
assignment contains language which suggest
that the parties intended to effect a complete
alienation of title to and rights over the
receivables which are the subject of the
assignment. This language is comprised of
works like "remise," "release and quitclaim"
and clauses like "the title and right of
possession to said accounts receivable is to
remain in said assignee" who "shall have the
right to collect directly from the debtor." The
same intent is also suggested by the use of
the words "agent and representative of the
assignee" in reffering to the assignor.
The point that appears to me to be worth
making is that although in its form, the deed
of assignment of receivables partakes of the
nature of a complete alienation of the
receivables assigned, such form should be
taken in conjunction with, and indeed must be
qualified and controlled by, other language
showing an intent of the parties that title to
the receivables shall pass to the assignee for
the limited
purpose of securing
another,
principal; obligation owed by the assignor to
the assignee. Title moves from assignor to
asignee but that title is defeasible being
designed to collateralize the principal
obligation. Operationally, what this means is
that the assignee is burdened with an
obligation of taking the proceeds of the
receivables assigned and applying such
proceeds to the satisfaction of the principal
obligation
and
returning
any
balance
remaining thereafter to the assignor.

The parties gave the deed of assignment the

form of an absolute conveyance of title over
the receivables assigned, essentially for the
convenience of the assignee. Without such
formally unlimited conveyance of title, the
assignee would have to treat the deed of
assignment as no more than a deed of pledge
or of chattel mortgage. In other words, in
such hypothetical case, should the assignee
seek to realize upon the security given to him
through the deed of assignment (which would
then have to comply with the documentation
and registration requirements of a pledge or
chattel mortgage), the assignee would have
to foreclose upon the securities or credits
assigned and place them on public sale and
there acquire the same. It should be recalled
that under the principle which forbids
a pactum commisorium Article 2088, Civil
Code), a mortgagee or pledgee is prohibited
from simply taking and appropriating the
personal property turned over to him as
security for the payment of a principal
obligation. A deed of assignment by way of
security avoids the necessity of a public sale
impose by the rule on pactum commisorium,
by in effect placing the sale of the collateral
up front. (Emphasis supplied)
The foregoing is applicable where, as in the
present instance, the deed of assignment of
receivables combines elements of both a
complete or absolute alienation of the credits
being assigned and a security arrangement to
assure payment of a principal obligation.
Where the second element is absent, that is,
where there is nothing to indicate that the
parties intended the deed of assignment to
function as a security device, it would of
course follow that the simple absolute
conveyance embodied in the deed of

assignment
would
be
operative;
the
assignment would constitute essentially a
mode of payment or dacion en pago. Put a
little differently, in order that a deed of
assignment of receivables which is in form an
absolute conveyance of title to the credits
being assigned, may be qualified and treated
as a security arrangement, language to such
effect must be found in the document itself
and that language, precisely, is embodied in
the deed of assignment in the instant case.
Finally, it might be noted that that deed
simply follows a form in standard use in
commercial banking.
Footnotes
* Penned by then Judge of the
Court of First Instance of
Manila, Ameurfina MelencioHerrera, now Associate Justice
of the Court.

REPUBLIC ACT No. 3765

AN ACT TO REQUIRE THE DISCLOSURE OF
FINANCE CHARGES IN CONNECTION
WITH EXTENSIONS OF CREDIT.
Section 1. This Act shall be known as the
"Truth in Lending Act."
Section 2. Declaration of Policy. It is hereby
declared to be the policy of the State to
protect its citizens from a lack of awareness
of the true cost of credit to the user by
assuring a full disclosure of such cost with a
view of preventing the uninformed use of
credit to the detriment of the national
economy.
Section 3. As used in this Act, the term
(1) "Board" means the Monetary Board
of the Central Bank of the Philippines.
(2)
"Credit"
means
any
loan,
mortgage, deed of trust, advance, or
discount;
any
conditional
sales
contract; any contract to sell, or sale
or contract of sale of property or
services, either for present or future
delivery, under which part or all of the
price is payable subsequent to the
making of such sale or contract; any
rental-purchase contract; any contract
or arrangement for the hire, bailment,
or leasing of property; any option,
demand, lien, pledge, or other claim
against, or for the delivery of, property
or money; any purchase, or other
acquisition of, or any credit upon the
security of, any obligation of claim
arising out of any of the foregoing; and

any
transaction
or
series
of
transactions having a similar purpose
or effect.
(3) "Finance charge" includes interest,
fees, service charges, discounts, and
such other charges incident to the
extension of credit as the Board may
be regulation prescribe.
(4) "Creditor" means any person
engaged in the business of extending
credit (including any person who as a
regular business practice make loans
or sells or rents property or services
on a time, credit, or installment basis,
either as principal or as agent) who
requires as an incident to the
extension of credit, the payment of a
finance charge.
(5) "Person" means any individual,
corporation, partnership, association,
or other organized group of persons,
or
the
legal
successor
or
representative of the foregoing, and
includes the Philippine Government or
any agency thereof, or any other
government, or of any of its political
subdivisions, or any agency of the
foregoing.
Section 4. Any creditor shall furnish to each
person to whom credit is extended, prior to
the consummation of the transaction, a clear
statement in writing setting forth, to the
extent applicable and in accordance with
rules and regulations prescribed by the Board,
the following information:

(1) the cash price or delivered price of

the property or service to be acquired;
(2) the amounts, if any, to be credited
as down payment and/or trade-in;
(3) the difference between the
amounts set forth under clauses (1)
and (2);
(4) the charges, individually itemized,
which are paid or to be paid by such
person
in
connection
with
the
transaction but which are not incident
to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in
terms of pesos and centavos; and
(7) the percentage that the finance
bears to the total amount to be
financed expressed as a simple annual
rate on the outstanding unpaid
balance of the obligation.
Section 5. The Board shall prescribe such
rules and regulations as may be necessary or
proper in carrying out the provisions of this
Act. Any rule or regulation prescribed
hereunder may contain such classifications
and differentiations as in the judgment of the
Board are necessary or proper to effectuate
the purposes of this Act or to prevent
circumvention or evasion, or to facilitate the
enforcement of this Act, or any rule or
regulation issued thereunder.

Section 6. (a) Any creditor who in connection

with any credit transaction fails to disclose to
any person any information in violation of this
Act or any regulation issued thereunder shall
be liable to such person in the amount of
P100 or in an amount equal to twice the
finance charged required by such creditor in
connection with such transaction, whichever
is the greater, except that such liability shall
not exceed P2,000 on any credit transaction.
Action to recover such penalty may be
brought by such person within one year from
the date of the occurrence of the violation, in
any court of competent jurisdiction. In any
action under this subsection in which any
person is entitled to a recovery, the creditor
shall be liable for reasonable attorney's fees
and court costs as determined by the court.
(b) Except as specified in subsection
(a) of this section, nothing contained
in this Act or any regulation contained
in this Act or any regulation
thereunder shall affect the validity or
enforceability of any contract or
transactions.
(c) Any person who willfully violates
any provision of this Act or any
regulation issued thereunder shall be
fined by not less than P1,00 or more
than P5,000 or imprisonment for not
less than 6 months, nor more than one
year or both.
(d) No punishment or penalty provided
by this Act shall apply to the Philippine
Government or any agency or any
political subdivision thereof.

(e) A
final
judgment hereafter
rendered in any criminal proceeding
under this Act to the effect that a
defendant has willfully violated this
Act shall be prima facie evidence
against such defendant in an action or
proceeding brought by any other party
against such defendant under this Act
as to all matters respecting which said
judgment would be an estoppel as
between the parties thereto.
Section 7. This Act shall become effective
upon approval.
Approved: June 22, 1963

G.R. No. 161426

FELIPE
P.
ARCILLA,
vs.
DEVELOPMENT
BANK
PHILIPPINES, Respondent.

June 30, 2005

JR., Petitioner,
OF

THE

DECISION
CALLEJO, SR., J.:
Atty. Felipe P. Arcilla, Jr. was employed by the
Development Bank of the Philippines (DBP) in
October 1981. About five or six months
thereafter, he was assigned to the legal
department, and thereafter, decided to avail
of a loan under the Individual Housing Project
(IHP) of the bank.1 On September 12, 1983,
DBP and Arcilla executed a Deed of
Conditional Sale2 over a parcel of land, as well
as the house to be constructed thereon, for
the price ofP160,000.00. Arcilla borrowed the
said amount from DBP for the purchase of the
lot and the construction of a residential
building thereon. He obliged himself to pay
the loan in 25 years, with a monthly
amortization ofP1,417.91, with 9% interest
per annum, to be deducted from his monthly
salary.3

G.R. No. 161397

June 30, 2005

DEVELOPMENT
BANK
OF
PHILIPPINES, Petitioner,
vs.
FELIPE P. ARCILLA, JR., Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x

THE

DBP obliged itself to transfer the title of the

property upon the payment of the loan,
including any increments thereof. It was also
agreed therein that if Arcilla availed of
optional retirement, he could elect to
continue paying the loan, provided that the
loan/amount would be converted into a
regular real estate loan account with the
prevailing interest assigned on real estate
loans, payable within the remaining term of
the loan account.4

Arcilla was notified of the periodic release of

his loan.5 During the period of July 1984 to
December
31,
1986,
the
monthly
amortizations for the said account were
deducted from his monthly salary, for which
he was issued receipts.6
The monthly amortization was increased
to P1,468.92
in
November
1984,
and
to P1,691.51
beginning
January
1985.
However, Arcilla opted to resign from the
bank in December 1986. Conformably with
the Deed of Conditional Sale, the bank
informed him, on June 11, 1987, that the
balance of his loan account with the bank had
been converted to a regular housing loan,
thus:
Amount converted
to PHLoan

Interest Rate

P 155,218.79 - 1

9%

6,802.45 - 2

9%

24,342.91 - 3

9%

less:
i.

Interest on advances at 7% p.a. over

DBP's borrowing cost:

ii.

No 2% service charge

iii.

No 8% penalty charge

a.2 On the amount advanced or balance

thereof that remains unpaid for more than
30 days:
i.

One
time
2%
]
service charge

-To
computed
from

be

iii.

Interest on the
]
service charge

the start
the 30-day

of

iv.

76.41
P1,690.61
======
===

On July 24, 1987, Arcilla signed three

Promissory Notes8 for the total amount
of P186,364.15. He was also obliged to pay
service charge and interests, as follows:
a.1 On the amount advanced or balance
thereof that remains unpaid for 30 days*

Arcilla also
following:

8%
penalty ]
charge on the
balances
of the advances
and
service
charge.9
agreed

to

pay

to

Interest
and Interest - 7% p.a. over
penalty charge borrowing
cost
Penalty charge 8%
p.a.
if
unpaid
after 30 days from
date of advance

i.

Interest of the ]
advance at
7% p.a.
DBP's
borrowing
costs;

ii.

Plus: MRI at PC.

P1,614.20
41/thousand

P186,364.15 Total

Interest on the ]
advance at 7% ]
p.a.
over
DBP's
borrowing cost;

b.2

over

]
]-- To be computed
from start of 30day period

ii.

One time 2%
]
service charge

iii.

Interest on the
]
service charge

iv.

period

8%
penalty ]
charge on the ]
balances
of ]
the
advance
and
service charge.

*Insurance Premiums - 30-day period to be

computed from date of advances.
DBP

the

*Insurance Premiums - 30-day period to be

computed from date of advances
Other Advances - 30-day period
computed from date of notification

to

b.

Taxes

b.1

One
time 2% of the
service charge advanced

be

amount

Other Advances - 30-day period

computed from date of notification.

to

be

b.

Taxes

b.1

One
time 2% of the amount
service charge
advanced

b.2

Interest
and Interest - 7% p.a.
penalty charge over borrowing cost
Penalty charge 8%
p.a.
if
unpaid

12
after 30 days from to P241,940.93. DBP rescinded the Deed of
Conditional Sale by notarial act on November
date of advance
27, 1990.13 Nevertheless, it wrote Arcilla, on
January 3, 1992, giving him until October 24,
However, Arcilla also agreed to the
1992, within which to repurchase the property
reservation by the DBP of its right to increase
upon full payment of the current appraisal or
(with notice to him) the "rate of interest on
updated total, whichever is lesser; in case of
the loan, as well as all other fees and charges
failure to do so, the property would be
on loans and advances pursuant to such
advertised for bidding.14 DBP reiterated the
policy as it may adopt from time to time
said offer on October 7, 1992. 15 Arcilla failed
during the period of the loan; Provided, that
to respond. Consequently, the property was
the rate of interest on the loan shall be
advertised for sale at public bidding on
reduced by law or by the Monetary Board;
February 14, 1994.16
Provided, further, that the adjustment in the
rate of interest shall take effect on or after
Arcilla filed a complaint against DBP with the
the effectivity of the increase or decrease in
Regional Trial Court (RTC) of Antipolo, Rizal,
the maximum rate of interest."10
on February 21, 1994. He alleged that DBP

Upon his request, DBP agreed to grant Arcilla

an additional cash advance of P32,000.00.
Thereafter, on May 23, 1984, a Supplement to
the Conditional Sale Agreement was executed
in which DBP and Arcilla agreed on the
following terms of the loan:
Amount

Interest Rate Per Annum

P32,000.
00

Nine (9%) per cent MRI for

P32,000.00 at P0.40/1,000.00

P32,000.
00

same to be consolidated with

the
original
advance
in
accordance with Condition No. 8
hereof.11

The
additional
advance
was,
thus,
consolidated to the outstanding balance of
Arcilla's original advance, payable within the
remaining term thereof at 9% per annum.
However, he failed to pay his loan account,
advances, penalty charges and interests
which, as of October 31, 1990, amounted

failed to furnish him with the disclosure

statement required by Republic Act (R.A.) No.
3765 and Central Bank (CB) Circular No. 158
prior to the execution of the deed of
conditional sale and the conversion of his
loan account with the bank into a regular
housing loan account. Despite this, DBP
immediately deducted the account from his
salary as early as 1984. Moreover, the bank
applied its own formula and imposed its
usurious interests, penalties and charges on
his loan account and advances. He further
alleged, thus:
13. That when plaintiff could no longer copeup with defendant's illegal and usurious
impositions, the DBP unilaterally increased
further the rate of interest, without notice to
the latter, and heaped-up usurious interests,
penalties and charges;
---

14. That to further bend the back of the

plaintiff, defendant rescinded the subject
deed of conditional sale on 4 December 1990
without giving due notice to plaintiff;

15. That much later, on 10 October 1993,

plaintiff received a letter from defendant
dated 19 September 1993, informing plaintiff
that the subject deed of conditional sale was
already rescinded on 4 December 1990 (xerox
copy of the same is hereto attached and
made an integral part hereof as Annex "C";17
In its answer to the complaint, the DBP
alleged that it substantially complied with
R.A. No. 3765 and CB Circular No. 158
because the details required in said
statements were particularly disclosed in the
promissory notes, deed of conditional sale
and the required notices sent to Arcilla. In any
event, its failure to comply strictly with R.A.
No. 3765 did not affect the validity and
enforceability of the subject contracts or
transactions. DBP interposed a counterclaim
for the possession of the property.
On April 27, 2001, the trial court rendered
judgment in favor of Arcilla and nullified the
notarial rescission of the deeds executed by
the parties. The fallo of the decision reads:
WHEREFORE, premises considered, judgment
is hereby rendered in favor of the plaintiff and
against
the
defendant.1avvphil.zw+ Defendant is hereby
directed to furnish the disclosure statement
to the plaintiff within five (5) days upon
receipt hereof in the manner and form
provided by R.A. No. 3765 and submit to this
Court for approval the total obligation of the
plaintiff as of this date, within ten (10) days
from receipt of this order. The Notarial
Rescission (Exh. "16") dated November 27,
1990 is hereby declared null and void. Costs
against the defendant.
SO ORDERED.18

DBP appealed the decision to the Court of

Appeals (CA) wherein it made the following
assignment of errors:
4.1. The trial court erred in ruling that
the provision of the details of the loan
without the issuance of a "Disclosure
Statement" is not compliance with the
"Truth in Lending Act;"
4.2. The trial court erred in declaring
the Notarial Rescission null and void;
and
4.3. The trial court erred in denying
DBP's counterclaims for recovery of
possession, back rentals and litigation
expenses.19
On May 29, 2003, the CA rendered judgment
setting aside and reversing the decision of
the RTC. In ordering the dismissal of the
complaint, the appellate court ruled that DBP
substantially complied with R.A. No. 3765 and
CB Circular No. 158. Arcilla filed a motion for
reconsideration of the decision. For its part,
DBP filed a motion for partial reconsideration
of the decision, praying that Arcilla be
ordered to vacate the property. However, the
appellate court denied both motions.
The parties filed separate petitions for review
on certiorari with this Court. The first petition,
entitled Development Bank of the Philippines
v. Court of Appeals, was docketed as G.R. No.
161397; the second petition, entitled Felipe
Arcilla, Jr. v. Court of Appeals, was docketed
as G.R. No. 161426. The Court resolved to
consolidate the two cases.
The issues raised in the two petitions are the
following: a) whether or not petitioner DBP
complied with the disclosure requirement of

R.A. No. 3765 and CB Circular No. 158, Series

of 1978, in the execution of the deed of
conditional sale, the supplemental deed of
conditional sale, as well as the promissory
notes; and b) whether or not respondent
Felipe Arcilla, Jr. is mandated to vacate the
property and pay rentals for his occupation
thereof after the notarial rescission of the
deed of conditional sale was rescinded by
notarial act, as well as the supplement
executed by DBP.
On the first issue, Arcilla avers that under R.A.
No. 3765 and CB Circular No. 158, the DBP, as
the creditor bank, was mandated to furnish
him with the requisite information in such
form prescribed by the Central Bank before
the commutation of the loan transaction. He
avers that the disclosure of the details of the
loan contained in the deed of conditional sale
and the supplement thereto, the promissory
notes and release sheet, do not constitute
substantial compliance with the law and the
CB Circular. He avers that the required
disclosure did not include the following:
[T]he percentage of Finance Charges to
Total
Amount
Financed
(Computed
in
accordance with Sec. 2(i) of CB Circular 158;
the Additional Charges in case certain
stipulations in the contract are not met by the
debtor; Total Non-Finance Charges; Total
Finance Charges, Effective Interest Rate, etc.
20
Arcilla further posits that the failure of DBP to
comply with its obligation under R.A. No. 3765
and CB Circular No. 158 forecloses its right to
rescind the transaction between them, and to
demand compliance of his obligation arising
from said transaction. Moreover, the bank had
no right to deduct the monthly amortizations
from his salary without first complying with
the mandate of R.A. No. 3765.

DBP, on the other hand, avers that all the

information required by R.A. No. 3765 was
already contained in the loan transaction
documents. It posits that even if it failed to
comply
strictly
with
the
disclosure
requirement of R.A. No. 3765, nevertheless,
under Section 6(b) of the law, the validity and
enforceability of any action or transaction is
not affected. It asserts that Arcilla was
estopped from invoking R.A. No. 3765
because he failed to demand compliance with
R.A. No. 3765 from the bank before the
consummation of the loan transaction, until
the time his complaint was filed with the trial
court.
In its petition in G.R. No. 161397, DBP asserts
that the RTC erred in not rendering judgment
on its counterclaim for the possession of the
subject property, and the liability of Arcilla for
rentals while in the possession of the property
after the notarial rescission of the deeds of
conditional sale. For his part, Arcilla (in G.R.
No. 161426) insists that the respondent failed
to comply with its obligation under R.A. No.
3765; hence, the notarial rescission of the
deed of conditional sale and the supplement
thereof was null and void. Until DBP complies
with its obligation, he is not obliged to comply
with his.
The petition of Arcilla has no merit.
Section 1 of R.A. No. 3765 provides that prior
to the consummation of a loan transaction,
the bank, as creditor, is obliged to furnish a
client with a clear statement, in writing,
setting forth, to the extent applicable and in
accordance with the rules and regulations
prescribed by the Monetary Board of the
Central Bank of the Philippines, the following
information:

(1) the cash price or delivered price of

the property or service to be acquired;
(2) the amounts, if any, to be credited
as down payment and/or trade-in;
(3) the difference between the
amounts set forth under clauses (1)
and (2);
(4) the charges, individually itemized,
which are paid or to be paid by such
person
in
connection
with
the
transaction but which are not incident
to the extension of credit;
(5) the total amount to be financed;
(6) the finance charges expressed in
terms of pesos and centavos; and
(7) the percentage that the finance
charge bears to the total amount to be
financed expressed as a simple annual
rate on the outstanding unpaid
balance of the obligation.
Under Circular No. 158 of the Central Bank,
the information required by R.A. No. 3765
shall be included in the contract covering the
credit transaction or any other document to
be acknowledged and signed by the debtor,
thus:
The contract covering the credit transaction,
or any other document to be acknowledged
and signed by the debtor, shall indicate the
above seven items of information. In addition,
the contract or document shall specify
additional charges, if any, which will be
collected in case certain stipulations in the
contract are not met by the debtor.

Furthermore, the contract or document shall

specify additional charges, if any, which will
be collected in case certain stipulations in the
contract are not met by the debtor.21

Lending Act (R.A. No. 3765), was enacted

primarily "to protect its citizens from a lack of
awareness of the true cost of credit to the
user

If the borrower is not duly informed of the

data required by the law prior to the
consummation of the availment or drawdown,
the lender will have no right to collect such
charge or increases thereof, even if stipulated
in the promissory note.22 However, such
failure shall not affect the validity or
enforceability of any contract or transaction. 23

by using a full disclosure of such cost with a

view of preventing the uninformed use of
credit to the detriment of the national
economy" (Emata vs. Intermediate Appellate
Court, 174, SCRA 464 [1989]; Sec. 2, R.A. No.
3765).Contrary to appellee's claim that he
was not sufficiently informed of the details of
the loan, the records disclose that the
required informations were readily available
in the three (3) promissory notes he
executed. Precisely, the said promissory notes
were executed to apprise appellee of the
remaining balance on his loan when the same
was converted into a regular housing loan.
And on its face, the promissory notes signed
by no less than the appellee readily shows all
the data required by the Truth in Lending Act
(R.A. No. 3765).

In the present case, DBP failed to disclose the

requisite information in the disclosure
statement form authorized by the Central
Bank, but did so in the loan transaction
documents between it and Arcilla. There is no
evidence on record that DBP sought to collect
or collected any interest, penalty or other
charges, from Arcilla other than those
disclosed
in
the
said
deeds/documents.1avvphi1.zw+
The Court is convinced that Arcilla's claim of
not
having
been
furnished
the
data/information required by R.A. No. 3765
and CB Circular No. 158 was but an
afterthought. Despite the notarial rescission
of the conditional sale in 1990, and DBP's
subsequent repeated offers to repurchase the
property, the latter maintained his silence.
Arcilla filed his complaint only on February 21,
1994, or four years after the said notarial
rescission. The Court finds and so holds that
the following findings and ratiocinations of
the CA are correct:
After a careful perusal of the records, We find
that the appellee had been sufficiently
informed of the terms and the requisite
charges necessarily included in the subject
loan. It must be stressed that the Truth in

Apropos, We agree with the appellant that

appellee, a lawyer, would not be so gullible or
negligent as to sign documents without
knowing fully well the legal implications and
consequences of his actions, and that
appellee was a former employee of appellant.
As such employee, he is as well presumed
knowledgeable with matters relating to
appellant's business and fully cognizant of the
terms of the loan he applied for, including the
charges that had to be paid.
It might have been different if the borrower
was, say, an ordinary employee eager to buy
his first house and is easily lured into
accepting onerous terms so long as the same
is payable on installments. In such cases, the
Court would be disposed to be stricter in the
application of the Truth in Lending Act,
insisting that the borrower be fully informed

of what he is entering into. But in the case at

bar, considering appellee's education and
training, We must hold, in the light of the
evidence at hand, that he was duly informed
of the necessary charges and fully understood
their implications and effects. Consequently,
the trial court's annulment of the rescission
anchored on this ground was unjustified.24
Anent the prayer of DBP to order Arcilla to
vacate the property and pay rentals therefor
from 1990, a review of the records has shown
that it failed to adduce evidence on the
reasonable amount of rentals for Arcilla's
occupancy of the property. Hence, the Court
orders a remand of the case to the court of
origin, for the parties to adduce their
respective
evidence
on
the
bank's
counterclaim.
IN LIGHT OF ALL THE FOREGOING, the
petition in G.R. No. 161426 is DENIED for
lack of merit. The petition in G.R. No. 161397
is
PARTIALLY GRANTED. The case is
hereby REMANDED to the Regional Trial
Court of Antipolo, Rizal, Branch 73, for it to
resolve the counterclaim of the Development
Bank of the Philippines for possession of the
property, and for the reasonable rentals for
Felipe P. Arcilla, Jr.'s occupancy thereof after
the notarial rescission of the Deed of
Conditional Sale in 1990.
Costs against petitioner Felipe P. Arcilla, Jr.
SO ORDERED.
ROMEO
J.
Associate Justice

CALLEJO,

SR.

amended by Presidential Decree No. 1795,

was filed against Go before the RTC. The
charge reads:

said bank, as required by the General Banking

Act.
CONTRARY TO LAW. [Emphasis supplied.]

G.R. No. 178429

2009

October 23,

JOSE
C.
GO, Petitioner,
vs.
BANGKO
SENTRAL
NG
PILIPINAS, Respondent.
DECISION
BRION, J.:
Through the present petition for review on
certiorari,1 petitioner Jose C. Go (Go) assails
the October 26, 2006 decision 2 of the Court of
Appeals (CA) in CA-G.R. SP No. 79149, as well
as its June 4, 2007 resolution.3 The CA
decision and resolution annulled and set
aside the May 20, 20034 and June 30,
20035 orders of the Regional Trial Court (RTC),
Branch 26, Manila which granted Gos motion
to quash the Information filed against him.
THE FACTS
On August 20, 1999, an Information6 for
violation of Section 83 of Republic Act No. 337
(RA 337) or the General Banking Act, as

That on or about and during the period

comprised between June 27, 1996 and
September 15, 1997, inclusive, in the City of
Manila, Philippines, the said accused, being
then the Director and the President and Chief
Executive Officer of the Orient Commercial
Banking Corporation (Orient Bank), a
commercial banking institution created,
organized and existing under Philippines laws,
with its main branch located at C.M. Recto
Avenue, this City, and taking advantage of his
position as such officer/director of the said
bank, did then and there wilfully, unlawfully
and knowingly borrow, either directly or
indirectly, for himself or as the representative
of his other related companies, the deposits
or
funds
of
the
said
banking
institution and/or become
a
guarantor,
indorser or obligor for loans from the said
bank to others, by then and there using said
borrowed deposits/funds of the said bank in
facilitating and granting and/or caused the
facilitating and granting of credit lines/loans
and, among others, to the New Zealand
Accounts loans in the total amount of TWO
BILLION AND SEVEN HUNDRED FIFTY-FOUR
MILLION NINE HUNDRED FIVE THOUSAND
AND EIGHT HUNDRED FIFTY-SEVEN AND 0/100
PESOS, Philippine Currency, said accused
knowing fully well that the same has been
done by him without the written approval of
the majority of the Board of Directors of said
Orient Bank and which approval the said
accused deliberately failed to obtain and
enter the same upon the records of said
banking institution and to transmit a copy of
which to the supervising department of the

On May 28, 2001, Go pleaded not guilty to

the offense charged.
After the arraignment, both the prosecution
and accused Go took part in the pre-trial
conference where the marking of the
voluminous evidence for the parties was
accomplished. After the completion of the
marking, the trial court ordered the parties to
proceed to trial on the merits.
Before the trial could commence, however,
Go filed on February 26, 20037 a motion to
quash the Information, which motion Go
amended on March 1, 2003.8 Go claimed that
the Information was defective, as the facts
charged therein do not constitute an offense
under Section 83 of RA 337 which states:
No director or officer of any banking
institution shall either directly or indirectly,
for himself or as the representative or agent
of another, borrow any of the deposits of
funds of such banks, nor shall he become a
guarantor, indorser, or surety for loans from
such bank, to others, or in any manner be an
obligor for money borrowed from the bank or
loaned by it, except with the written approval
of the majority of the directors of the bank,
excluding the director concerned. Any such
approval shall be entered upon the records of
the corporation and a copy of such entry shall
be transmitted forthwith to the appropriate
supervising department. The office of any
director or officer of a bank who violates the
provisions of this section shall immediately

become vacant and the director or officer

shall be punished by imprisonment of not less
than one year nor more than ten years and by
a fine of not less than one thousand nor more
than ten thousand pesos.
The Monetary Board may regulate the
amount of credit accommodations that may
be extended, directly or indirectly, by banking
institutions to their directors, officers, or
stockholders. However, the outstanding credit
accommodations which a bank may extend to
each of its stockholders owning two percent
(2%) or more of the subscribed capital stock,
its directors, or its officers, shall be limited to
an amount equivalent to the respective
outstanding deposits and book value of the
paid-in capital contribution in the bank.
Provided, however, that loans and advances
to officers in the form of fringe benefits
granted in accordance with rules and
regulations as may be prescribed by
Monetary Board shall not be subject to the
preceding limitation. (As amended by PD
1795)
In addition to the conditions established in
the preceding paragraph, no director or a
building and loan association shall engage in
any of the operations mentioned in said
paragraphs, except upon the pledge of shares
of the association having a total withdrawal
value greater than the amount borrowed. (As
amended by PD 1795)
In support of his motion to quash, Go averred
that based on the facts alleged in the
Information, he was being prosecuted for
borrowing the deposits or funds of the Orient
Bank and/or acting as a guarantor, indorser or
obligor for the banks loans to other persons.

The use of the word "and/or" meant that he

was charged for being either a borrower or a
guarantor, or for being both a borrower and
guarantor. Go claimed that the charge was
not only vague, but also did not constitute an
offense. He posited that Section 83 of RA 337
penalized only directors and officers of
banking institutions who acted either as
borrower or as guarantor, but not as both.
Go further pointed out that the Information
failed to state that his alleged act of
borrowing and/or guarantying was not among
the exceptions provided for in the law.
According to Go, the second paragraph of
Section 83 allowed banks to extend credit
accommodations to their directors, officers,
and stockholders, provided it is "limited to an
amount
equivalent
to
the
respective
outstanding deposits and book value of the
paid-in capital contribution in the bank."
Extending credit accommodations to bank
directors, officers, and stockholders is not per
se prohibited, unless the amount exceeds the
legal limit. Since the Information failed to
state that the amount he purportedly
borrowed and/or guarantied was beyond the
limit set by law, Go insisted that the acts so
charged did not constitute an offense.
Finding Gos contentions persuasive, the RTC
granted Gos motion to quash the Information
on May 20, 2003. It denied on June 30, 2003
the motion for reconsideration filed by the
prosecution.
The prosecution did not accept the RTC ruling
and filed a petition for certiorari to question it
before the CA. The Information, the
prosecution claimed, was sufficient. The word
"and/or" did not materially affect the validity

of the Information, as it merely stated a mode

of committing the crime penalized under
Section 83 of RA 337. Moreover, the
prosecution asserted that the second
paragraph of Section 83 (referring to the
credit accommodation limit) cannot be
interpreted as an exception to what the first
paragraph provided. The second paragraph
only sets borrowing limits that, if violated,
render the bank, not the director-borrower,
liable. A violation of the second paragraph of
Section 83 under which Go is being
prosecuted is therefore separate and
distinct from a violation of the first paragraph.
Thus, the prosecution prayed that the orders
of the RTC quashing the Information be set
aside and the criminal case against Go be
reinstated.
On October 26, 2006, the CA rendered the
assailed decision granting the prosecutions
petition for certiorari.9The CA declared that
the RTC misread the law when it decided to
quash the Information against Go. It
explained that the allegation that Go acted
either as a borrower or a guarantor or as both
borrower and guarantor merely set forth the
different modes by which the offense was
committed. It did not necessarily mean that
Go acted both as borrower and guarantor for
the same loan at the same time. It agreed
with the prosecutions stand that the second
paragraph of Section 83 of RA 337 is not an
exception to the first paragraph. Thus, the
failure of the Information to state that the
amount of the loan Go borrowed or
guaranteed exceeded the legal limits was, to
the CA, an irrelevant issue. For these reasons,
the CA annulled and set aside the RTCs
orders and ordered the reinstatement of the
criminal charge against Go. After the CAs

denial of his motion for reconsideration,10 Go

filed the present appeal by certiorari.

asks the Court to reverse the CA decision to

reinstate the criminal charge.

the facts alleged therein. We stated in People

v. Romualdez15 that:

THE PETITION

In its Comment,11 the prosecution raises the

same defenses against Gos contentions. It
insists on the sufficiency of the allegations in
the Information and prays for the denial of
Gos petition.

The determinative test in appreciating a

motion to quash xxx is the sufficiency of the
averments in the information, that is, whether
the facts alleged, if hypothetically admitted,
would establish the essential elements of the
offense as defined by law without considering
matters aliunde. As Section 6, Rule 110 of the
Rules of Criminal Procedure requires, the
information only needs to state the ultimate
facts; the evidentiary and other details can be
provided during the trial.

In his petition, Go alleges that the appellate

court legally erred in overturning the trial
courts orders. He insists that the Information
failed to allege the acts or omissions
complained of with sufficient particularity to
enable him to know the offense being
charged; to allow him to properly prepare his
defense; and likewise to allow the court to
render proper judgment.
Repeating his arguments in his motion to
quash, Go reads Section 83 of RA 337 as
penalizing a director or officer of a banking
institution for either borrowing the deposits or
funds of the bank, or guaranteeing or
indorsing loans to others, but not for
assuming both capacities. He claimed that
the prosecutions shotgun approach in
alleging that he acted as borrower and/or
guarantor rendered the Information highly
defective for failure to specify with certainty
the specific act or omission complained of. To
petitioner Go, the prosecutions approach was
a clear violation of his constitutional right to
be informed of the nature and cause of the
accusation against him.
Additionally, Go reiterates his claim that
credit accommodations by banks to their
directors and officers are legal and valid,
provided that these are limited to their
outstanding deposits and book value of the
paid-in capital contribution in the bank. The
failure to state that he borrowed deposits
and/or guaranteed loans beyond this limit
rendered the Information defective. He thus

THE COURTS RULING

The Court does not find the petition
meritorious and accordingly denies it.
The Accuseds Right to be Informed
Under the Constitution, a person who stands
charged of a criminal offense has the right to
be informed of the nature and cause of the
accusation against him.12 The Rules of Court,
in implementing the right, specifically require
that the acts or omissions complained of as
constituting the offense, including the
qualifying and aggravating circumstances,
must be stated in ordinary and concise
language, not necessarily in the language
used in the statute, but in terms sufficient to
enable a person of common understanding to
know what offense is being charged and the
attendant
qualifying
and
aggravating
circumstances present, so that the accused
can properly defend himself and the court can
pronounce judgment.13 To broaden the scope
of the right, the Rules authorize the quashal,
upon motion of the accused, of an
Information that fails to allege the acts
constituting the offense.14 Jurisprudence has
laid
down
the
fundamental
test
in
appreciating
a
motion
to
quash
an
Information grounded on the insufficiency of

To restate the rule, an Information only needs

to state the ultimate facts constituting the
offense, not the finer details of why and how
the illegal acts alleged amounted to undue
injury or damage matters that are
appropriate for the trial. [Emphasis supplied]
The facts and circumstances necessary to be
included in the Information are determined by
reference to the definition and elements of
the specific crimes. The Information must
allege clearly and accurately the elements of
the crime charged.16
Elements of Violation of
Section 83 of RA 337
Under Section 83, RA 337, the following
elements must be present to constitute a
violation of its first paragraph:
1. the offender is a director or officer
of any banking institution;

2. the offender, either directly or

indirectly,
for
himself
or
as
representative or agent of another,
performs any of the following acts:
a. he borrows any of the
deposits or funds of such bank;
or
b. he becomes a guarantor,
indorser, or surety for loans
from such bank to others, or
c. he becomes in any manner
an obligor for money borrowed
from bank or loaned by it;
3. the offender has performed any of
such acts without the written approval
of the majority of the directors of the
bank, excluding the offender, as the
director concerned.
A simple reading of the above elements easily
rejects Gos contention that the law penalizes
a bank director or officer only either for
borrowing the banks deposits or funds or for
guarantying loans by the bank, but not for
acting in both capacities. The essence of the
crime is becoming an obligor of the bank
without securing the necessary written
approval of the majority of the banks
directors.
The second element merely lists down the
various modes of committing the offense. The
third mode, by declaring that "[no director or
officer of any banking institution shall xxx] in
any manner be an obligor for money
borrowed from the bank or loaned by it," in
fact serves a catch-all phrase that covers any

situation when a director or officer of the

bank becomes its obligor. The prohibition is
directed against a bank director or officer who
becomes in any manner an obligor for money
borrowed from or loaned by the bank without
the written approval of the majority of the
banks board of directors. To make a
distinction between the act of borrowing and
guarantying
is
therefore
unnecessary
because in either situation, the director or
officer concerned becomes an obligor of the
bank against whom the obligation is
juridically demandable.
The language of the law is broad enough to
encompass either act of borrowing or
guaranteeing, or both. While the first
paragraph of Section 83 is penal in nature,
and by principle should be strictly construed
in favor of the accused, the Court is unwilling
to adopt a liberal construction that would
defeat the legislatures intent in enacting the
statute. The objective of the law should allow
for a reasonable flexibility in its construction.
Section 83 of RA 337, as well as other
banking
laws
adopting
the
same
prohibition,17 was enacted to ensure that
loans by banks and similar financial
institutions to their own directors, officers,
and stockholders are above board.18 Banks
were not created for the benefit of their
directors and officers; they cannot use the
assets of the bank for their own benefit,
except as may be permitted by law. Congress
has thus deemed it essential to impose
restrictions on borrowings by bank directors
and officers in order to protect the public,
especially the depositors.19 Hence, when the
law prohibits directors and officers of banking
institutions from becoming in any manner an
obligor of the bank (unless with the approval

of the board), the terms of the prohibition

shall be the standards to be applied to
directors transactions such as those involved
in the present case.
Credit accommodation limit is not an
exception nor is it an element of the offense
Contrary to Gos claims, the second
paragraph of Section 83, RA 337 does not
provide for an exception to a violation of the
first paragraph thereof, nor does it constitute
as an element of the offense charged. Section
83 of RA 337 actually imposes three
restrictions: approval, reportorial, and ceiling
requirements.
The approval requirement (found in the
first sentence of the first paragraph of the
law) refers to the written approval of the
majority of the banks board of directors
required before bank directors and officers
can in any manner be an obligor for money
borrowed from or loaned by the bank. Failure
to secure the approval renders the bank
director or officer concerned liable for
prosecution and, upon conviction, subjects
him to the penalty provided in the third
sentence of first paragraph of Section 83.
The reportorial requirement, on the other
hand, mandates that any such approval
should be entered upon the records of the
corporation, and a copy of the entry be
transmitted to the appropriate supervising
department. The reportorial requirement is
addressed to the bank itself, which, upon its
failure to do so, subjects it to quo warranto
proceedings under Section 87 of RA 337.20

The ceiling requirement under the second

paragraph of Section 83 regulates the amount
of credit accommodations that banks may
extend to their directors or officers by limiting
these to an amount equivalent to the
respective outstanding deposits and book
value of the paid-in capital contribution in the
bank. Again, this is a requirement directed at
the bank. In this light, a prosecution for
violation of the first paragraph of Section 83,
such as the one involved here, does not
require an allegation that the loan exceeded
the legal limit. Even if the loan involved is
below the legal limit, a written approval by
the majority of the banks directors is still
required; otherwise, the bank director or
officer who becomes an obligor of the bank is
liable.
Compliance
with
the
ceiling
requirement does not dispense with the
approval requirement.
Evidently, the failure to observe the three
requirements under Section 83 paves the way
for the prosecution of three different offenses,
each with its own set of elements. A
successful indictment for failing to comply
with the approval requirement will not
necessitate proof that the other two were
likewise not observed.
Rules of Court allow
insufficient Information

amendment

of

Assuming that the facts charged in the

Information do not constitute an offense, we
find it erroneous for the RTC to immediately
order the dismissal of the Information,
without giving the prosecution a chance to
amend it. Section 4 of Rule 117 states:

SEC.
4. Amendment
of
complaint
or
information.If the motion to quash is based
on an alleged defect of the complaint or
information which can
be cured by
amendment, the court shall order that an
amendment be made.
If it is based on the ground that the facts
charged do not constitute an offense, the
prosecution shall be given by the court an
opportunity to correct the defect by
amendment. The motion shall be granted if
the prosecution fails to make the amendment,
or the complaint or information still suffers
from
the
same
defect
despite
the
amendment. [Emphasis supplied]
Although an Information may be defective
because the facts charged do not constitute
an offense, the dismissal of the case will not
necessarily follow. The Rules specifically
require that the prosecution should be given a
chance to correct the defect; the court can
order
the
dismissal
only
upon
the
prosecutions failure to do so. The RTCs
failure to provide the prosecution this
opportunity twice21 constitutes an arbitrary
exercise of power that was correctly
addressed by the CA through the certiorari
petition. This defect in the RTCs action on the
case, while not central to the issue before us,
strengthens our conclusion that this criminal
case should be resolved through full-blown
trial on the merits.
WHEREFORE, we DENY the petitioners
petition for review on certiorari and AFFIRM
the decision of the Court of Appeals in CAG.R. SP No. 79149, promulgated on October
26, 2006, as well as its resolution of June 4,
2007. The Regional Trial Court, Branch 26,

Manila is directed to PROCEED with the

hearing of Criminal Case No. 99-178551.
Costs against the petitioner.
SO ORDERED.
ARTURO
Associate Justice

D.

BRION

G.R. No. 162336

2010

February 1,

WHEREFORE, premises
instant
petition
for
hereby DENIED.7

considered,
certiorari

the
is

Factual Antecedents
HILARIO
P.
SORIANO, Petitioner,
vs.
PEOPLE OF THE PHILIPPINES, BANGKO
SENTRAL
NG
PILIPINAS
(BSP),
PHILIPPINE
DEPOSIT
INSURANCE
CORPORATION
(PDIC),
PUBLIC
PROSECUTOR ANTONIO C.BUAN, and
STATE
PROSECUTOR
ALBERTO
R.
FONACIER, Respondents.
DECISION
DEL CASTILLO, J.:
A bank officer violates the DOSRI2 law when
he acquires bank funds for his personal
benefit, even if such acquisition was
facilitated by a fraudulent loan application.
Directors, officers, stockholders, and their
related interests cannot be allowed to
interpose the fraudulent nature of the loan as
a defense to escape culpability for their
circumvention of Section 83 of Republic Act
(RA) No. 337.3
Before us is a Petition for Review
on Certiorari4 under Rule 45 of the Rules of
Court, assailing the September 26, 2003
Decision5 and
the
February
5,
2004
Resolution6 of the Court of Appeals (CA) in
CA-G.R. SP No. 67657. The challenged
Decision disposed as follows:

Sometime in 2000, the Office of Special

Investigation (OSI) of the Bangko Sentral ng
Pilipinas (BSP),
through
its
officers,8 transmitted a letter9 dated March
27, 2000 to Jovencito Zuo, Chief State
Prosecutor of the Department of Justice
(DOJ). The letter attached as annexes five
affidavits,10 which would allegedly serve as
bases for filing criminal charges for Estafa
thru Falsification of Commercial Documents,
in relation to Presidential Decree (PD) No.
1689,11 and for Violation of Section 83 of RA
337, as amended by PD 1795,12 against, inter
alia, petitioner herein Hilario P. Soriano. These
five affidavits, along with other documents,
stated that spouses Enrico and Amalia Carlos
appeared to have an outstanding loan of P8
million with the Rural Bank of San Miguel
(Bulacan), Inc. (RBSM), but had never applied
for nor received such loan; that it was
petitioner, who was then president of RBSM,
who had ordered, facilitated, and received the
proceeds of the loan; and that the P8 million
loan had never been authorized by RBSM's
Board of Directors and no report thereof had
ever been submitted to the Department of
Rural Banks, Supervision and Examination
Sector of the BSP. The letter of the OSI, which
was not subscribed under oath, ended with a
request that a preliminary investigation be
conducted and the corresponding criminal
charges be filed against petitioner at his last
known address.

Acting on the letter-request and its annexes,

State Prosecutor Albert R. Fonacier proceeded
with the preliminary investigation. He issued
a subpoena with the witnesses affidavits and
supporting documents attached, and required
petitioner to file his counter-affidavit. In due
course, the investigating officer issued a
Resolution finding probable cause and
correspondingly
filed
two
separate
informations against petitioner before the
Regional Trial Court (RTC) of Malolos,
Bulacan.13
The first Information,14 dated November 14,
2000 and docketed as Criminal Case No. 237M-2001, was for estafa through falsification of
commercial documents, under Article 315,
paragraph 1(b), of the Revised Penal Code
(RPC), in relation to Article 172 of the RPC
and PD 1689. It basically alleged that
petitioner and his co-accused, in abuse of the
confidence reposed in them as RBSM officers,
caused the falsification of a number of loan
documents, making it appear that one Enrico
Carlos filled up the same, and thereby
succeeded in securing a loan and converting
the loan proceeds for their personal gain and
benefit.15 The information reads:
That in or about the month of April, 1997, and
thereafter, in San Miguel, Bulacan, and within
the jurisdiction of this Honorable Court, the
said accused HILARIO P. SORIANO and
ROSALINDA ILAGAN, as principals by direct
participation, with unfaithfulness or abuse of
confidence and taking advantage of their
position as President of the Rural Bank of San
Miguel (Bulacan), Inc. and Branch Manager of
the Rural Bank of San Miguel San Miguel
Branch [sic], a duly organized banking
institution under Philippine Laws, conspiring,

confederating and mutually helping one

another, did then and there, willfully and
feloniously falsify loan documents consisting
of undated loan application/information sheet,
credit proposal dated April 14, 1997, credit
proposal dated April 22, 1997, credit
investigation report dated April 15, 1997,
promissory note dated April 23, 1997,
disclosure
statement
on
loan/credit
transaction dated April 23, 1997, and other
related documents, by making it appear that
one
Enrico
Carlos
filled
up
the
application/information sheet and filed the
aforementioned loan documents when in
truth and in fact Enrico Carlos did not
participate in the execution of said loan
documents and that by virtue of said
falsification and with deceit and intent to
cause damage, the accused succeeded in
securing a loan in the amount of eight million
pesos (PhP8,000,000.00) from the Rural Bank
of San Miguel San Ildefonso branch in the
name of Enrico Carlos which amount of PhP8
million representing the loan proceeds the
accused thereafter converted the same
amount to their own personal gain and
benefit, to the damage and prejudice of the
Rural Bank of San Miguel San Ildefonso
branch, its creditors, the Bangko Sentral ng
Pilipinas, and the Philippine Deposit Insurance
Corporation.
CONTRARY TO LAW.16
The other Information17 dated November 10,
2000 and docketed as Criminal Case No. 238M-2001, was for violation of Section 83 of RA
337, as amended by PD 1795. The said
provision refers to the prohibition against the
so-called DOSRI loans. The information
alleged that, in his capacity as President of

RBSM, petitioner indirectly secured an P8

million loan with RBSM, for his personal use
and benefit, without the written consent and
approval of the bank's Board of Directors,
without entering the said transaction in the
bank's records, and without transmitting a
copy of the transaction to the supervising
department of the bank. His ruse was
facilitated by placing the loan in the name of
an unsuspecting RBSM depositor, one Enrico
Carlos.18 The information reads:
That in or about the month of April, 1997, and
thereafter, and within the jurisdiction of this
Honorable Court, the said accused, in his
capacity as President of the Rural Bank of San
Miguel (Bulacan), Inc., did then and there,
willfully and feloniously indirectly borrow or
secure a loan with the Rural Bank of San
Miguel San Ildefonso branch, a domestic
rural banking institution created, organized
and existing under Philippine laws, amounting
to eight million pesos (PhP8,000,000.00),
knowing fully well that the same has been
done by him without the written consent and
approval of the majority of the board of
directors of the said bank, and which consent
and approval the said accused deliberately
failed to obtain and enter the same upon the
records of said banking institution and to
transmit a copy thereof to the supervising
department of the said bank, as required by
the General Banking Act, by using the name
of one depositor Enrico Carlos of San Miguel,
Bulacan, the latter having no knowledge of
the said loan, and one in possession of the
said
amount
of
eight
million
pesos
(PhP8,000,000.00), accused converted the
same to his own personal use and benefit, in
flagrant violation of the said law.

CONTRARY TO LAW.19
Both cases were raffled to Branch 79 of the
RTC of Malolos, Bulacan.20
On June 8, 2001, petitioner moved to
quash21 these informations on two grounds:
that the court had no jurisdiction over the
offense charged, and that the facts charged
do not constitute an offense.
On the first ground, petitioner argued that the
letter transmitted by the BSP to the DOJ
constituted the complaint and hence was
defective for failure to comply with the
mandatory requirements of Section 3(a), Rule
112 of the Rules of Court, such as the
statement of address of petitioner and oath
and
subscription.22 Moreover,
petitioner
argued that the officers of OSI, who were the
signatories to the "letter-complaint," were not
authorized by the BSP Governor, much less by
the Monetary Board, to file the complaint.
According to petitioner, this alleged fatal
oversight violated Section 18, pars. (c) and
(d) of the New Central Bank Act (RA 7653).
On the second ground, petitioner contended
that the commission of estafa under
paragraph 1(b) of Article 315 of the RPC is
inherently incompatible with the violation of
DOSRI law (as set out in Section 83 23 of RA
337, as amended by PD 1795),24 hence a
person cannot be charged for both offenses.
He argued that a violation of DOSRI law
requires the offender to obtain a loan from
his bank, without complying with procedural,
reportorial, or ceiling requirements. On the
other hand, estafa under par. 1(b), Article 315
of the RPC requires the offender to
misappropriate or convert something that

he holds in trust, or on commission, or

for administration, or under any other
obligation involving the duty to return the
same.25

Aggrieved,
petitioner
filed
a
Petition
for Certiorari29 with the CA, reiterating his
arguments before the trial court.
Ruling of the Court of Appeals

Essentially, the petitioner theorized that the

characterization of possession is different in
the two offenses. If petitioner acquired the
loan as DOSRI, he owned the loaned money
and therefore, cannot misappropriate or
convert it as contemplated in the offense of
estafa. Conversely, if petitioner committed
estafa, then he merely held the money in
trust for someone else and therefore, did not
acquire a loan in violation of DOSRI rules.
Ruling of the Regional Trial Court
26

In an Order dated August 8, 2001, the trial

court denied petitioner's Motion to Quash for
lack of merit. The lower court agreed with the
prosecution that the assailed OSI letter
was not the complaint-affidavit itself; thus, it
need not comply with the requirements under
the Rules of Court. The trial court held that
the affidavits, which were attached to the OSI
letter, comprised the complaint-affidavit in
the case. Since these affidavits were duly
subscribed and sworn to before a notary
public, there was adequate compliance with
the Rules. The trial court further held that the
two offenses were separate and distinct
violations, hence the prosecution of one did
not pose a bar to the other.27
Petitioners Motion for Reconsideration was
likewise denied in an Order dated September
5, 2001.28

The CA denied the petition on both issues

presented by petitioner.
On the first issue, the CA determined that the
BSP letter, which petitioner characterized to
be a fatally infirm complaint, was not actually
a complaint, but a transmittal or cover letter
only. This transmittal letter merely contained
a summary of the affidavits which were
attached to it. It did not contain any averment
of personal knowledge of the events and
transactions that constitute the elements of
the offenses charged. Being a mere
transmittal letter, it need not comply with the
requirements of Section 3(a) of Rule 112 of
the Rules of Court.30

violation of the DOSRI law and the

commission of estafa thru falsification of
commercial
documents
are
inherently
inconsistent with each other. It explained that
the test in considering a motion to quash on
the ground that the facts charged do not
constitute an offense, is whether the facts
alleged,
when
hypothetically
admitted,
constitute the elements of the offense
charged. The appellate court held that this
test was sufficiently met because the
allegations in the assailed informations, when
hypothetically admitted, clearly constitute the
elements of Estafa thru Falsification of
Commercial Documents and Violation of
DOSRI law.32
Petitioners Motion for Reconsideration33 was
likewise denied for lack of merit.
Hence, this petition.
Issues

The CA further determined that the five

affidavits attached to the transmittal letter
should be considered as the complaintaffidavits that charged petitioner with
violation of Section 83 of RA 337 and for
Estafa thru Falsification of Commercial
Documents.
These
complaint-affidavits
complied with the mandatory requirements
set out in the Rules of Court they were
subscribed and sworn to before a notary
public and subsequently certified by State
Prosecutor
Fonacier,
who
personally
examined the affiants and was convinced that
the affiants fully understood their sworn
statements.31
Anent the second ground, the CA found no
merit in petitioner's argument that the

Restated, petitioner raises

issues34 for our consideration:

the

following

I
Whether the complaint complied with the
mandatory requirements provided under
Section 3(a), Rule 112 of the Rules of Court
and Section 18, paragraphs (c) and (d) of RA
7653.
II
Whether a loan transaction within the ambit
of the DOSRI law (violation of Section 83 of
RA 337, as amended) could also be the

subject of Estafa under Article 315 (1) (b) of

the Revised Penal Code.
III
Is a petition for certiorari under Rule 65 the
proper remedy against an Order denying a
Motion to Quash?
IV
Whether petitioner is entitled to a writ of
injunction.
Our Ruling
The petition lacks merit.
First Issue:
Whether the complaint complied with
the mandatory requirements provided
under Section 3(a), Rule 112 of the
Rules
of
Court
and
Section
18,
paragraphs (c) and (d) of Republic Act
No. 7653
Petitioner moved to withdraw the first issue
from the instant petition
On
March
5,
2007,
the
Court
noted35 petitioner's Manifestation and Motion
for Partial Withdrawal of the Petition 36dated
February 7, 2007. In the said motion,
petitioner informed the Court of the
promulgation of a Decision entitled Soriano v.
Hon.
Casanova,37 which
also
involved
petitioner and similar BSP letters to the DOJ.
According to petitioner, the said Decision
allegedly ruled squarely on the nature of the

BSP letters and the validity of the sworn

affidavits attached thereto. For this reason,
petitioner moved for the partial withdrawal of
the instant petition insofar as it involved the
issue of "whether or not a court can legally
acquire jurisdiction over a complaint which
failed to comply with the mandatory
requirements provided under Section 3(a),
Rule 112 of the Rules of Court and Section 18,
paragraphs (c) and (d) of RA 7653".38
Given that the case had already been
submitted for resolution of the Court when
petitioner filed his latest motion, and that all
respondents had presented their positions
and arguments on the first issue, the Court
deems it proper to rule on the same.
In Soriano v. Hon. Casanova, the Court held
that the affidavits attached to the BSP
transmittal
letter
complied
with
the
mandatory requirements under the Rules of
Court.
To be sure, the BSP letters involved in Soriano
v. Hon. Casanova39 are not the same as the
BSP letter involved in the instant case.
However, the BSP letters in Soriano v. Hon.
Casanova and the BSP letter subject of this
case are similar in the sense that they are all
signed by the OSI officers of the BSP, they
were not sworn to by the said officers, they all
contained summaries of their attached
affidavits, and they all requested the conduct
of a preliminary investigation and the filing of
corresponding criminal charges against
petitioner Soriano. Thus, the principle of stare
decisis dictates that the ruling in Soriano v.
Hon. Casanova be applied in the instant case
once a question of law has been examined

and decided, it should be deemed settled and

closed to further argument.40
We held in Soriano v. Hon. Casanova, after a
close scrutiny of the letters transmitted by
the BSP to the DOJ, that these were not
intended to be the complaint, as envisioned
under the Rules. They did not contain
averments of personal knowledge of the
events and transactions constitutive of any
offense. The letters merely transmitted for
preliminary investigation the affidavits of
people who had personal knowledge of the
acts of petitioner. We ruled that these
affidavits, not the letters transmitting them,
initiated the preliminary investigation. Since
these affidavits were subscribed under oath
by the witnesses who executed them before a
notary public, then there was substantial
compliance with Section 3(a), Rule 112 of the
Rules of Court.
Anent the contention that there was no
authority from the BSP Governor or the
Monetary Board to file a criminal case against
Soriano, we held that the requirements of
Section 18, paragraphs (c) and (d) of RA 7653
did not apply because the BSP did not
institute
the
complaint
but
merely
transmitted the affidavits of the complainants
to the DOJ.
We further held that since the offenses for
which Soriano was charged were public
crimes, authority holds that it can be initiated
by "any competent person" with personal
knowledge of the acts committed by the
offender. Thus, the witnesses who executed
the affidavits clearly fell within the purview of
"any competent person" who may institute
the complaint for a public crime.

The ruling in Soriano v. Hon. Casanova has

been adopted and elaborated upon in the
recent case of Santos-Concio v. Department
of Justice.41 Instead of a transmittal letter
from the BSP, the Court in Santos-Concio was
faced with an NBI-NCR Report, likewise with
affidavits of witnesses as attachments. Ruling
on the validity of the witnesses sworn
affidavits as bases for a preliminary
investigation, we held:
The Court is not unaware of the practice of
incorporating all allegations in one document
denominated as "complaint-affidavit." It does
not pronounce strict adherence to only one
approach, however, for there are cases where
the extent of ones personal knowledge may
not cover the entire gamut of details material
to the alleged offense. The private offended
party or relative of the deceased may not
even have witnessed the fatality, in which
case the peace officer or law enforcer has to
rely chiefly on affidavits of witnesses. The
Rules do not in fact preclude the attachment
of a referral or transmittal letter similar to
that of the NBI-NCR. Thus, in Soriano v.
Casanova, the Court held:
A close scrutiny of the letters transmitted by
the BSP and PDIC to the DOJ shows that these
were not intended
to
be the complaint
envisioned under the Rules. It may be clearly
inferred from the tenor of the letters that the
officers merely intended to transmit the
affidavits of the bank employees to the DOJ.
Nowhere in the transmittal letters is there any
averment on the part of the BSP and PDIC
officers of personal knowledge of the events
and transactions constitutive of the criminal
violations alleged to have been made by the
accused. In fact, the letters clearly stated that

what the OSI of the BSP and the LIS of the

PDIC did was to respectfully transmit to the
DOJ for preliminary investigation the affidavits
and personal knowledge of the acts of the
petitioner. These affidavits were subscribed
under oath by the witnesses who executed
them
before
a
notary
public.
Since
the affidavits, not the letters transmitting
them,
were
intended
to initiate the
preliminary investigation, we hold that
Section 3(a), Rule 112 of the Rules of Court
was substantially complied with.
Citing the ruling of this Court in Ebarle v.
Sucaldito, the Court of Appeals correctly held
that a complaint for purposes of preliminary
investigation by the fiscal need not be filed by
the offended party. The rule has been
that,unless the offense subject thereof is
one that cannot be prosecuted de
oficio, the same may be filed, for preliminary
investigation purposes, by any competent
person. The crime of estafa is a public crime
which can be initiated by "any competent
person." The witnesses who executed the
affidavits based on their personal knowledge
of the acts committed by the petitioner fall
within the purview of "any competent person"
who may institute the complaint for a public
crime. x x x (Emphasis and italics supplied)
A preliminary investigation can thus validly
proceed on the basis of an affidavit of
any competent person, without the referral
document, like the NBI-NCR Report, having
been sworn to by the law enforcer as the
nominal complainant. To require otherwise is
a needless exercise. The cited case of Oporto,
Jr. v. Judge Monserate does not appear to dent
this proposition. After all, what is required is
to reduce the evidence into affidavits, for

while reports and even raw information may

justify the initiation of an investigation, the
preliminary investigation stage can be held
only after sufficient evidence has been
gathered and evaluated which may warrant
the eventual prosecution of the case in
court.42
Following the foregoing rulings in Soriano v.
Hon.
Casanova
and
Santos-Concio
v.
Department of Justice, we hold that the BSP
letter, taken together with the affidavits
attached
thereto,
comply
with
the
requirements provided under Section 3(a),
Rule 112 of the Rules of Court and Section 18,
paragraphs (c) and (d) of RA 7653.
Second Issue:
Whether a loan transaction within the ambit
of the DOSRI law (violation of Section 83 of
RA 337, as amended) could be the subject of
Estafa under Article 315 (1) (b) of the
Revised Penal Code
The second issue was raised by petitioner in
the context of his Motion to Quash
Information on the ground that the facts
charged do not constitute an offense.43 It is
settled that in considering a motion to quash
on such ground, the test is "whether the facts
alleged, if hypothetically admitted, would
establish the essential elements of the
offense charged as defined by law. The trial
court may not consider a situation contrary to
that set forth in the criminal complaint or
information. Facts that constitute the defense
of the petitioner[s] against the charge under
the information must be proved by [him]
during trial. Such facts or circumstances do

not constitute proper grounds for a motion to

quash the information on the ground that the
material averments do not constitute the
offense". 44
We have examined the two informations
against petitioner and we find that they
contain allegations which, if hypothetically
admitted, would establish the essential
elements of the crime of DOSRI violation and
estafa thru falsification of commercial
documents.
In Criminal Case No. 238-M-2001 for violation
of DOSRI rules, the information alleged that
petitioner Soriano was the president of RBSM;
that he was able to indirectly obtain a loan
from RBSM by putting the loan in the name of
depositor Enrico Carlos; and that he did this
without complying with the requisite board
approval,
reportorial,
and
ceiling
requirements.
In Criminal Case No. 237-M-2001 for estafa
thru falsification of commercial documents,
the information alleged that petitioner, by
taking advantage of his position as president
of RBSM, falsified various loan documents to
make it appear that an Enrico Carlos secured
a loan of P8 million from RBSM; that petitioner
succeeded in obtaining the loan proceeds;
that he later converted the loan proceeds to
his own personal gain and benefit; and that
his action caused damage and prejudice to
RBSM, its creditors, the BSP, and the PDIC.
Significantly, this is not the first occasion that
we adjudge the sufficiency of similarly worded
informations. In Soriano v. People, 45 involving
the same petitioner in this case (but different
transactions),
we
also
reviewed
the

sufficiency of informations for DOSRI violation

and estafa thru falsification of commercial
documents, which were almost identical,
mutatis
mutandis,
with
the
subject
informations herein. We held in Soriano v.
People that there is no basis for the quashal
of the informations as "they contain material
allegations charging Soriano with violation of
DOSRI rules and estafa thru falsification of
commercial documents".
Petitioner raises the theory that he could not
possibly be held liable for estafa in
concurrence with the charge for DOSRI
violation. According to him, the DOSRI charge
presupposes that he acquired a loan, which
would
make
the
loan
proceeds
his own money and which he could neither
possibly misappropriate nor convert to the
prejudice of another, as required by the
statutory definition of estafa.46 On the other
hand, if petitioner did not acquire any loan,
there can be no DOSRI violation to speak of.
Thus, petitioner posits that the two offenses
cannot co-exist. This theory does not
persuade us.
Petitioners theory is based on the false
premises that the loan was extended to him
by the bank in his own name, and that he
became the owner of the loan proceeds. Both
premises are wrong.
The bank money (amounting to P8 million)
which came to the possession of petitioner
was money held in trust or administration by
him for the bank, in his
fiduciary capacity as the President of said
bank.47 It is not accurate to say that petitioner
became the owner of theP8 million because it

was the proceeds of a loan. That would have

been correct if the bank knowingly extended
the loan to petitioner himself. But that is not
the case here. According to the information
for estafa, the loan was supposed to be for
another person, a certain "Enrico Carlos";
petitioner, through falsification, made it
appear that said "Enrico Carlos" applied for
the loan when in fact he ("Enrico Carlos") did
not.
Through
such
fraudulent
device,
petitioner obtained the loan proceeds and
converted
the
same.
Under
these
circumstances, it cannot be said that
petitioner became the legal owner of the P8
million. Thus, petitioner remained the banks
fiduciary with respect to that money, which
makes it capable of misappropriation or
conversion in his hands.
The next question is whether there can also
be, at the same time, a charge for DOSRI
violation in such a situation wherein the
accused bank officer did not secure a loan in
his own name, but was alleged to have used
the name of another person in order to
indirectly secure a loan from the bank. We
answer this in the affirmative. Section 83 of
RA 337 reads:
Section 83. No director or officer of any
banking institution shall, either directly or
indirectly, for himself or as the representative
or agent of others, borrow any of the deposits
of funds of such bank, nor shall he become a
guarantor, indorser, or surety for loans from
such bank to others, or in any manner be an
obligor for moneys borrowed from the bank or
loaned by it, except with the written approval
of the majority of the directors of the bank,
excluding the director concerned. Any such
approval shall be entered upon the records of

the corporation and a copy of such entry shall

be
transmitted
forthwith
to
the
Superintendent of Banks. The office of any
director or officer of a bank who violates the
provisions of this section shall immediately
become vacant and the director or officer
shall be punished by imprisonment of not less
than one year nor more than ten years and by
a fine of not less than one thousand nor more
than ten thousand pesos. x x x
The prohibition in Section 83 is broad enough
to cover various modes of borrowing.[48] It
covers loans by a bank director or officer (like
herein petitioner) which are made either: (1)
directly, (2) indirectly, (3) for himself, (4) or
as the representative or agent of others. It
applies even if the director or officer is a mere
guarantor, indorser or surety for someone
else's loan or is in any manner an obligor for
money borrowed from the bank or loaned by
it. The covered transactions are prohibited
unless the approval, reportorial and ceiling
requirements under Section 83 are complied
with. The prohibition is intended to protect
the public, especially the depositors,[49] from
the overborrowing of bank funds by bank
officers, directors, stockholders and related
interests, as such overborrowing may lead to
bank failures.[50] It has been said that
"banking institutions are not created for the
benefit of the directors [or officers]. While
directors have great powers as directors, they
have no special privileges as individuals. They
cannot use the assets of the bank for their
own benefit except as permitted by law.
Stringent restrictions are placed about them
so that when acting both for the bank and for
one of themselves at the same time, they
must keep within certain prescribed lines

regarded by the legislature as essential to

safety in the banking business".51
A direct borrowing is obviously one that is
made in the name of the DOSRI himself or
where the DOSRI is a named party, while an
indirect borrowing includes one that is made
by a third party, but the DOSRI has a stake in
the transaction.52 The latter type indirect
borrowing applies here. The information in
Criminal Case 238-M-2001 alleges that
petitioner "in his capacity as President of
Rural Bank of San Miguel San Ildefonso
branch x x x indirectly borrow[ed] or
secure[d] a loan with [RBSM] x x x knowing
fully well that the same has been done by him
without the written consent and approval of
the majority of the board of directors x x x,
and which consent and approval the said
accused deliberately failed to obtain and
enter the same upon the records of said
banking institution and to transmit a copy
thereof to the supervising department of the
said bank x x x by using the name of one
depositor Enrico Carlos x x x, the latter
having no knowledge of the said loan, and
once in possession of the said amount of
eight million pesos (P8 million), [petitioner]
converted the same to his own personal use
and benefit".53
The foregoing information describes the
manner of securing the loan as indirect;
names petitioner as the benefactor of the
indirect
loan;
and
states
that
the
requirements of the law were not complied
with.
It
contains
all
the
required
elements54 for a violation of Section 83, even
if petitioner did not secure the loan in his own
name.

The broad interpretation of the prohibition in

Section 83 is justified by the fact that it even
expressly covers loans to third parties where
the third parties are aware of the transaction
(such as principals represented by the
DOSRI), and where the DOSRIs interest does
not appear to be beneficial but even
burdensome (such as in cases when the
DOSRI acts as a mere guarantor or surety). If
the law finds it necessary to protect the bank
and the banking system in such situations, it
will surely be illogical for it to exclude a case
like this where the DOSRI acted for his own
benefit, using the name of an unsuspecting
person.
A
contrary
interpretation
will
effectively allow a DOSRI to use dummies to
circumvent the requirements of the law.
In sum, the informations filed
petitioner do not negate each other.

against

Third Issue:
Is a Rule 65 petition for certiorari the
proper remedy against an Order denying
a Motion to Quash?
This issue may be speedily resolved by
adopting
our
ruling
in
Soriano
v.
People,55 where we held:
In fine, the Court has consistently held that a
special civil action for certiorari is not the
proper remedy to assail the denial of a motion
to quash an information. The proper
procedure in such a case is for the accused to
enter a plea, go to trial without prejudice on
his part to present the special defenses he
had invoked in his motion to quash and if
after trial on the merits, an adverse decision
is rendered, to appeal therefrom in the

manner authorized by law. Thus, petitioners

should not have forthwith filed a special civil
action for certiorari with the CA and instead,
they should have gone to trial and reiterated
the special defenses contained in their motion
to quash. There are no special or exceptional
circumstances in the present case that would
justify immediate resort to a filing of a
petition for certiorari. Clearly, the CA did not
commit any reversible error, much less, grave
abuse of discretion in dismissing the
petition.56

injunction. It is the strong arm of equity that

should never be extended unless to cases of
great injury, where courts of law cannot afford
an adequate or commensurate remedy in
damages.
Every court should remember that an
injunction is a limitation upon the freedom of
action of the [complainant] and should not be
granted lightly or precipitately. It should be
granted only when the court is fully satisfied
that the law permits it and the emergency
demands it.

Fourth Issue:
Whether petitioner is entitled to a writ of
injunction
The requisites to justify an injunctive relief
are: (1) the right of the complainant is clear
and unmistakable; (2) the invasion of the
right sought to be protected is material and
substantial; and (3) there is an urgent and
paramount necessity for the writ to prevent
serious damage. A clear legal right means
one clearly founded in or granted by law or is
"enforceable as a matter of law." Absent any
clear and unquestioned legal right, the
issuance of an injunctive writ would constitute
grave abuse of discretion.57 Caution and
prudence must, at all times, attend the
issuance of an injunctive writ because it
effectively disposes of the main case without
trial
and/or
due
process.58In Olalia
v.
59
Hizon, the Court held as follows:
It has been consistently held that there is no
power the exercise of which is more delicate,
which requires greater caution, deliberation
and sound discretion, or more dangerous in a
doubtful case, than the issuance of an

Given this Court's findings in the earlier

issues of the instant case, we find no
compelling reason to grant the injunctive
relief sought by petitioner.
WHEREFORE, the petition is DENIED. The
assailed September 26, 2003 Decision as well
as the February 5, 2004 Resolution of the
Court of Appeals in CA-G.R. SP No. 67657
are AFFIRMED. Costs against petitioner.

G.R. No. 155001

x---------------------------------------------------------x
G.R. No. 155547 May 5, 2003

SO ORDERED.
MARIANO
C.
Associate Justice

WORKERS UNION - NATIONAL LABOR

UNION (MWU-NLU), and PHILIPPINE
AIRLINES
EMPLOYEES
ASSOCIATION
(PALEA),petitioners,
vs.
PHILIPPINE
INTERNATIONAL
AIR
TERMINALS
CO.,
INC.,
MANILA
INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT OF TRANSPORTATION AND
COMMUNICATIONS
and
SECRETARY
LEANDRO M. MENDOZA, in his capacity
as
Head
of
the
Department
of
Transportation
and
Communications, respondents,
MIASCOR
GROUNDHANDLING
CORPORATION, DNATA-WINGS AVIATION
SYSTEMS CORPORATION, MACROASIAEUREST SERVICES, INC., MACROASIAMENZIES
AIRPORT
SERVICES
CORPORATION,
MIASCOR
CATERING
SERVICES
CORPORATION,
MIASCOR
AIRCRAFT MAINTENANCE CORPORATION,
and
MIASCOR
LOGISTICS
CORPORATION, petitioners-in-intervention,

DEL

CASTILLO

May 5, 2003

DEMOSTHENES P. AGAN, JR., JOSEPH B.

CATAHAN, JOSE MARI B. REUNILLA,
MANUEL ANTONIO B. BOE, MAMERTO S.
CLARA, REUEL E. DIMALANTA, MORY V.
DOMALAON, CONRADO G. DIMAANO,
LOLITA R. HIZON, REMEDIOS P. ADOLFO,
BIENVENIDO
C.
HILARIO,
MIASCOR

SALACNIB F. BATERINA, CLAVEL A.

MARTINEZ
and
CONSTANTINO
G.
JARAULA, petitioners,
vs.
PHILIPPINE
INTERNATIONAL
AIR
TERMINALS
CO.,
INC.,
MANILA
INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT OF TRANSPORTATION AND
COMMUNICATIONS,
DEPARTMENT
OF
PUBLIC
WORKS
AND
HIGHWAYS,
SECRETARY LEANDRO M. MENDOZA, in
his capacity as Head of the Department
of Transportation and Communications,
and
SECRETARY
SIMEON
A.
DATUMANONG, in his capacity as Head

of the Department of Public Works and

Highways, respondents,
JACINTO V. PARAS, RAFAEL P. NANTES,
EDUARDO C. ZIALCITA, WILLY BUYSON
VILLARAMA, PROSPERO C. NOGRALES,
PROSPERO A. PICHAY, JR., HARLIN CAST
ABAYON,
and
BENASING
O.
MACARANBON,respondents-intervenors,
x---------------------------------------------------------x
G.R. No. 155661 May 5, 2003
CEFERINO C. LOPEZ, RAMON M. SALES,
ALFREDO B. VALENCIA, MA. TERESA V.
GAERLAN, LEONARDO DE LA ROSA, DINA
C. DE LEON, VIRGIE CATAMIN RONALD
SCHLOBOM, ANGELITO SANTOS, MA.
LUISA M. PALCON and SAMAHANG
MANGGAGAWA
SA
PALIPARAN
NG
PILIPINAS
(SMPP), petitioners,
vs.
PHILIPPINE
INTERNATIONAL
AIR
TERMINALS
CO.,
INC.,
MANILA
INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT OF TRANSPORTATION AND
COMMUNICATIONS,
SECRETARY
LEANDRO M. MENDOZA, in his capacity
as
Head
of
the
Department
of
Transportation
and
Communications, respondents.
PUNO, J.:
Petitioners and petitioners-in-intervention
filed the instant petitions for prohibition under
Rule 65 of the Revised Rules of Court seeking
to prohibit the Manila International Airport
Authority (MIAA) and the Department of
Transportation and Communications (DOTC)
and its Secretary from implementing the
following agreements executed by the
Philippine Government through the DOTC and

the MIAA and the Philippine International Air

Terminals Co., Inc. (PIATCO): (1) the
Concession Agreement signed on July 12,
1997, (2) the Amended and Restated
Concession Agreement dated November 26,
1999, (3) the First Supplement to the
Amended
and
Restated
Concession
Agreement dated August 27, 1999, (4) the
Second Supplement to the Amended and
Restated
Concession
Agreement
dated
September 4, 2000, and (5) the Third
Supplement to the Amended and Restated
Concession Agreement dated June 22, 2001
(collectively, the PIATCO Contracts).
The facts are as follows:
In August 1989, the DOTC engaged
the services of Aeroport de Paris (ADP)
to conduct a comprehensive study of
the Ninoy Aquino International Airport
(NAIA) and determine whether the
present airport can cope with the
traffic development up to the year
2010. The study consisted of two
parts: first, traffic forecasts, capacity
of existing facilities, NAIA future
requirements, proposed master plans
and development plans; and second,
presentation of the preliminary design
of the passenger terminal building.
The ADP submitted a Draft Final Report
to the DOTC in December 1989.
Some time in 1993, six business
leaders consisting of John Gokongwei,
Andrew Gotianun, Henry Sy, Sr., Lucio
Tan, George Ty and Alfonso Yuchengco
met with then President Fidel V. Ramos
to explore the possibility of investing
in the construction and operation of a
new international airport terminal. To
signify their commitment to pursue
the project, they formed the Asia's

Emerging Dragon Corp. (AEDC) which

was registered with the Securities and
Exchange
Commission
(SEC)
on
September 15, 1993.
On October 5, 1994, AEDC submitted
an
unsolicited
proposal
to
the
Government through the DOTC/MIAA
for
the
development
of
NAIA
International Passenger Terminal III
(NAIA IPT III) under a build-operateand-transfer arrangement pursuant to
RA 6957 as amended by RA 7718 (BOT
Law).1
On December 2, 1994, the DOTC issued Dept.
Order
No.
94-832
constituting
the
Prequalification Bids and Awards Committee
(PBAC) for the implementation of the NAIA IPT
III project.
On March 27, 1995, then DOTC Secretary Jose
Garcia endorsed the proposal of AEDC to the
National
Economic
and
Development
Authority (NEDA). A revised proposal,
however, was forwarded by the DOTC to
NEDA on December 13, 1995. On January 5,
1996, the NEDA Investment Coordinating
Council (NEDA ICC) Technical Board
favorably endorsed the project to the ICC
Cabinet Committee which approved the
same, subject to certain conditions, on
January 19, 1996. On February 13, 1996, the
NEDA passed Board Resolution No. 2 which
approved the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA
caused the publication in two daily
newspapers of an invitation for competitive or
comparative proposals on AEDC's unsolicited
proposal, in accordance with Sec. 4-A of RA
6957, as amended. The alternative bidders
were required to submit three (3) sealed
envelopes on or before 5:00 p.m. of

September 20, 1996. The first envelope

should
contain
the
Prequalification
Documents, the second envelope the
Technical Proposal, and the third envelope the
Financial Proposal of the proponent.

i. First 5 years

ii. Next 10 years

On June 20, 1996, PBAC Bulletin No. 1 was
issued, postponing the availment of the Bid
Documents and the submission of the
comparative bid proposals. Interested firms
were permitted to obtain the Request for
Proposal Documents beginning June 28, 1996,
upon submission of a written application and
payment of a non-refundable fee of
P50,000.00 (US$2,000).
The Bid Documents issued by the PBAC
provided among others that the proponent
must have adequate capability to sustain the
financing requirement for the detailed
engineering, design, construction, operation,
and maintenance phases of the project. The
proponent would be evaluated based on its
ability to provide a minimum amount of
equity to the project, and its capacity to
secure external financing for the project.
On July 23, 1996, the PBAC issued PBAC
Bulletin No. 2 inviting all bidders to a pre-bid
conference on July 29, 1996.
On August 16, 1996, the PBAC issued PBAC
Bulletin No. 3 amending the Bid Documents.
The following amendments were made on the
Bid Documents:
a. Aside from the fixed Annual
Guaranteed Payment, the proponent
shall include in its financial proposal
an additional percentage of gross
revenue share of the Government, as
follows:

iii. Next 10 years

b. The amount of the fixed Annual

Guaranteed Payment shall be subject
of the price challenge. Proponent may
offer an Annual Guaranteed Payment
which need not be of equal amount,
but payment of which shall start upon
site possession.
c. The project proponent must have
adequate capability to sustain the
financing requirement for the detailed
engineering,
design,
construction,
and/or operation and maintenance
phases of the project as the case may
be. For purposes of pre-qualification,
this capability shall be measured in
terms of:
i. Proof of the availability of the
project proponent and/or the
consortium to provide the
minimum amount of equity for
the project; and
ii. a letter testimonial from
reputable banks attesting that
the project proponent and/or
the members of the consortium
are banking with them, that the
project proponent and/or the
members are of good financial

standing, and have adequate

resources.
d. The basis for the prequalification
shall be the proponent's compliance
with the minimum technical and
financial requirements provided in the
Bid Documents and the IRR of the BOT
Law. The minimum amount of equity
shall be 30% of the Project Cost.
e.
Amendments
to
the
draft
Concession Agreement shall be issued
from time to time. Said amendments
shall only cover items that would not
materially affect the preparation of the
proponent's proposal.
On August 29, 1996, the Second Pre-Bid
Conference
was
held
where
certain
clarifications were made. Upon the request of
prospective bidder People's Air Cargo &
Warehousing Co., Inc (Paircargo), the PBAC
warranted that based on Sec. 11.6, Rule 11 of
the Implementing Rules and Regulations of
the BOT Law, only the proposed Annual
Guaranteed Payment submitted by the
challengers would be revealed to AEDC, and
that the challengers' technical and financial
proposals would remain confidential. The
PBAC also clarified that the list of revenue
sources contained in Annex 4.2a of the Bid
Documents was merely indicative and that
other revenue sources may be included by
the proponent, subject to approval by
DOTC/MIAA. Furthermore, the PBAC clarified
that
only
those
fees
and
charges
denominated as Public Utility Fees would be
subject to regulation, and those charges
which would be actually deemed Public Utility
Fees could still be revised, depending on the
outcome of PBAC's query on the matter with
the Department of Justice.

In September 1996, the PBAC issued Bid

Bulletin No. 5, entitled "Answers to the
Queries of PAIRCARGO as Per Letter Dated
September 3 and 10, 1996." Paircargo's
queries and the PBAC's responses were as
follows:
1. It is difficult for Paircargo and
Associates to meet the required
minimum equity requirement as
prescribed in Section 8.3.4 of the Bid
Documents considering that the
capitalization
of
each
member
company is so structured to meet the
requirements and needs of their
current
respective
business
undertaking/activities. In order to
comply with this equity requirement,
Paircargo is requesting PBAC to just
allow
each
member
of
(sic)
corporation of the Joint Venture to just
execute an agreement that embodies
a commitment to infuse the required
capital in case the project is awarded
to the Joint Venture instead of
increasing each corporation's current
authorized capital stock just for
prequalification purposes.
In prequalification, the agency is
interested in one's financial capability
at the time of prequalification, not
future or potential capability.
A commitment to put up equity once
awarded the project is not enough to
establish that "present" financial
capability. However, total financial
capability of all member companies of
the Consortium, to be established by
submitting the respective companies'
audited financial statements, shall be
acceptable.

2. At present, Paircargo is negotiating

with banks and other institutions for
the extension of a Performance
Security to the joint venture in the
event that the Concessions Agreement
(sic) is awarded to them. However,
Paircargo is being required to submit a
copy of the draft concession as one of
the
documentary
requirements.
Therefore, Paircargo is requesting that
they'd (sic) be furnished copy of the
approved
negotiated
agreement
between the PBAC and the AEDC at
the soonest possible time.
A copy of the draft Concession
Agreement is included in the Bid
Documents. Any material changes
would be made known to prospective
challengers through bid bulletins.
However, a final version will be issued
before the award of contract.
The PBAC also stated that it would require
AEDC to sign Supplement C of the Bid
Documents (Acceptance of Criteria and
Waiver of Rights to Enjoin Project) and to
submit the same with the required Bid
Security.
On September 20, 1996, the consortium
composed of People's Air Cargo and
Warehousing Co., Inc. (Paircargo), Phil. Air and
Grounds Services, Inc. (PAGS) and Security
Bank Corp. (Security Bank) (collectively,
Paircargo
Consortium)
submitted
their
competitive proposal to the PBAC. On
September 23, 1996, the PBAC opened the
first envelope containing the prequalification
documents of the Paircargo Consortium. On
the following day, September 24, 1996, the
PBAC prequalified the Paircargo Consortium.

On September 26, 1996, AEDC informed the

PBAC in writing of its reservations as regards
the Paircargo Consortium, which include:
a. The lack of corporate approvals and
financial capability of PAIRCARGO;
b. The lack of corporate approvals and
financial capability of PAGS;
c. The prohibition imposed by RA 337,
as amended (the General Banking Act)
on the amount that Security Bank
could legally invest in the project;
d. The inclusion of Siemens as a
contractor of the PAIRCARGO Joint
Venture, for prequalification purposes;
and
e. The appointment of Lufthansa as
the facility operator, in view of the
Philippine requirement in the operation
of a public utility.
The PBAC gave its reply on October 2, 1996,
informing AEDC that it had considered the
issues raised by the latter, and that based on
the documents submitted by Paircargo and
the established prequalification criteria, the
PBAC had found that the challenger,
Paircargo, had prequalified to undertake the
project. The Secretary of the DOTC approved
the finding of the PBAC.
The PBAC then proceeded with the opening of
the second envelope of the Paircargo
Consortium which contained its Technical
Proposal.
On October 3, 1996, AEDC reiterated its
objections, particularly with respect to
Paircargo's financial capability, in view of the

restrictions imposed by Section 21-B of the

General Banking Act and Sections 1380 and
1381 of the Manual Regulations for Banks and
Other Financial Intermediaries. On October 7,
1996, AEDC again manifested its objections
and requested that it be furnished with
excerpts of the PBAC meeting and the
accompanying technical evaluation report
where each of the issues they raised were
addressed.
On October 16, 1996, the PBAC opened the
third envelope submitted by AEDC and the
Paircargo
Consortium
containing
their
respective
financial
proposals.
Both
proponents offered to build the NAIA
Passenger Terminal III for at least $350 million
at no cost to the government and to pay the
government: 5% share in gross revenues for
the first five years of operation, 7.5% share in
gross revenues for the next ten years of
operation, and 10% share in gross revenues
for the last ten years of operation, in
accordance
with
the
Bid
Documents.
However, in addition to the foregoing, AEDC
offered to pay the government a total of P135
million as guaranteed payment for 27 years
while Paircargo Consortium offered to pay the
government a total of P17.75 billion for the
same period.
Thus, the PBAC formally informed AEDC that
it had accepted the price proposal submitted
by the Paircargo Consortium, and gave AEDC
30 working days or until November 28, 1996
within which to match the said bid, otherwise,
the project would be awarded to Paircargo.
As AEDC failed to match the proposal within
the 30-day period, then DOTC Secretary
Amado Lagdameo, on December 11, 1996,
issued a notice to Paircargo Consortium
regarding AEDC's failure to match the
proposal.

On February 27, 1997, Paircargo Consortium

incorporated into Philippine International
Airport Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged
undue preference given to PIATCO and
reiterated its objections as regards the
prequalification of PIATCO.
On April 11, 1997, the DOTC submitted the
concession agreement for the second-pass
approval of the NEDA-ICC.
On April 16, 1997, AEDC filed with the
Regional Trial Court of Pasig a Petition for
Declaration of Nullity of the Proceedings,
Mandamus and Injunction against the
Secretary of the DOTC, the Chairman of the
PBAC, the voting members of the PBAC and
Pantaleon D. Alvarez, in his capacity as
Chairman of the PBAC Technical Committee.
On April 17, 1997, the NEDA-ICC conducted
an ad referendum to facilitate the approval,
on a no-objection basis, of the BOT
agreement between the DOTC and PIATCO. As
the ad referendum gathered only four (4) of
the required six (6) signatures, the NEDA
merely noted the agreement.
On July 9, 1997, the DOTC issued the notice of
award for the project to PIATCO.
On July 12, 1997, the Government, through
then DOTC Secretary Arturo T. Enrile, and
PIATCO, through its President, Henry T. Go,
signed the "Concession Agreement for the
Build-Operate-and-Transfer Arrangement of
the Ninoy Aquino International Airport
Passenger Terminal III" (1997 Concession
Agreement). The Government granted PIATCO
the franchise to operate and maintain the
said terminal during the concession period

and to collect the fees, rentals and other

charges in accordance with the rates or
schedules stipulated in the 1997 Concession
Agreement. The Agreement provided that the
concession period shall be for twenty-five (25)
years commencing from the in-service date,
and may be renewed at the option of the
Government for a period not exceeding
twenty-five (25) years. At the end of the
concession period, PIATCO shall transfer the
development facility to MIAA.
On November 26, 1998, the Government and
PIATCO signed an Amended and Restated
Concession Agreement (ARCA). Among the
provisions of the 1997 Concession Agreement
that were amended by the ARCA were: Sec.
1.11 pertaining to the definition of "certificate
of completion"; Sec. 2.05 pertaining to the
Special Obligations of GRP; Sec. 3.02 (a)
dealing with the exclusivity of the franchise
given to the Concessionaire; Sec. 4.04
concerning the assignment by Concessionaire
of its interest in the Development Facility;
Sec. 5.08 (c) dealing with the proceeds of
Concessionaire's insurance; Sec. 5.10 with
respect to the temporary take-over of
operations by GRP; Sec. 5.16 pertaining to
the taxes, duties and other imposts that may
be levied on the Concessionaire; Sec. 6.03 as
regards the periodic adjustment of public
utility fees and charges; the entire Article VIII
concerning the provisions on the termination
of the contract; and Sec. 10.02 providing for
the venue of the arbitration proceedings in
case a dispute or controversy arises between
the parties to the agreement.
Subsequently, the Government and PIATCO
signed three Supplements to the ARCA. The
First Supplement was signed on August 27,
1999; the Second Supplement on September
4, 2000; and the Third Supplement on June
22, 2001 (collectively, Supplements).

The First Supplement to the ARCA amended

Sec. 1.36 of the ARCA defining "Revenues" or
"Gross Revenues"; Sec. 2.05 (d) of the ARCA
referring to the obligation of MIAA to provide
sufficient funds for the upkeep, maintenance,
repair and/or replacement of all airport
facilities and equipment which are owned or
operated by MIAA; and further providing
additional special obligations on the part of
GRP aside from those already enumerated in
Sec. 2.05 of the ARCA. The First Supplement
also provided a stipulation as regards the
construction of a surface road to connect
NAIA Terminal II and Terminal III in lieu of the
proposed access tunnel crossing Runway
13/31; the swapping of obligations between
GRP and PIATCO regarding the improvement
of Sales Road; and the changes in the
timetable. It also amended Sec. 6.01 (c) of
the ARCA pertaining to the Disposition of
Terminal Fees; Sec. 6.02 of the ARCA by
inserting an introductory paragraph; and Sec.
6.02 (a) (iii) of the ARCA referring to the
Payments of Percentage Share in Gross
Revenues.
The Second Supplement to the ARCA
contained provisions concerning the clearing,
removal,
demolition
or
disposal
of
subterranean
structures
uncovered
or
discovered at the site of the construction of
the terminal by the Concessionaire. It defined
the scope of works; it provided for the
procedure for the demolition of the said
structures and the consideration for the same
which the GRP shall pay PIATCO; it provided
for
time
extensions,
incremental
and
consequential costs and losses consequent to
the existence of such structures; and it
provided for some additional obligations on
the part of PIATCO as regards the said
structures.

Finally, the Third Supplement provided for the

obligations of the Concessionaire as regards
the construction of the surface road
connecting Terminals II and III.
Meanwhile, the MIAA which is charged with
the maintenance and operation of the NAIA
Terminals I and II, had existing concession
contracts with various service providers to
offer international airline airport services,
such as in-flight catering, passenger handling,
ramp
and
ground
support,
aircraft
maintenance and provisions, cargo handling
and warehousing, and other services, to
several international airlines at the NAIA.
Some of these service providers are the
Miascor
Group,
DNATA-Wings
Aviation
Systems Corp., and the MacroAsia Group.
Miascor, DNATA and MacroAsia, together with
Philippine Airlines (PAL), are the dominant
players in the industry with an aggregate
market share of 70%.
On September 17, 2002, the workers of the
international
airline
service
providers,
claiming that they stand to lose their
employment upon the implementation of the
questioned agreements, filed before this
Court a petition for prohibition to enjoin the
enforcement of said agreements.2
On October 15, 2002, the service providers,
joining the cause of the petitioning workers,
filed a motion for intervention and a petitionin-intervention.
On October 24, 2002, Congressmen Salacnib
Baterina, Clavel Martinez and Constantino
Jaraula filed a similar petition with this Court.3
On November 6, 2002, several employees of
the MIAA likewise filed a petition assailing the
legality of the various agreements.4

On December 11, 2002. another group of

Congressmen, Hon. Jacinto V. Paras, Rafael P.
Nantes, Eduardo C. Zialcita, Willie B.
Villarama, Prospero C. Nograles, Prospero A.
Pichay, Jr., Harlin Cast Abayon and Benasing
O. Macaranbon, moved to intervene in the
case as Respondents-Intervenors. They filed
their Comment-In-Intervention defending the
validity of the assailed agreements and
praying for the dismissal of the petitions.
During the pendency of the case before this
Court, President Gloria Macapagal Arroyo, on
November 29, 2002, in her speech at the
2002 Golden Shell Export Awards at
Malacaang Palace, stated that she will not
"honor
(PIATCO)
contracts
which
the
Executive Branch's legal offices have
concluded (as) null and void."5
Respondent PIATCO filed its Comments to the
present petitions on November 7 and 27,
2002. The Office of the Solicitor General and
the Office of the Government Corporate
Counsel filed their respective Comments in
behalf of the public respondents.
On December 10, 2002, the Court heard the
case on oral argument. After the oral
argument, the Court then resolved in open
court to require the parties to file
simultaneously their respective Memoranda in
amplification of the issues heard in the oral
arguments within 30 days and to explore the
possibility of arbitration or mediation as
provided in the challenged contracts.
In their consolidated Memorandum, the Office
of the Solicitor General and the Office of the
Government Corporate Counsel prayed that
the present petitions be given due course and
that judgment be rendered declaring the
1997 Concession Agreement, the ARCA and
the Supplements thereto void for being

contrary to the Constitution, the BOT Law and

its Implementing Rules and Regulations.
On March 6, 2003, respondent PIATCO
informed the Court that on March 4, 2003
PIATCO commenced arbitration proceedings
before
the
International
Chamber
of
Commerce, International Court of Arbitration
(ICC) by filing a Request for Arbitration with
the Secretariat of the ICC against the
Government of the Republic of the Philippines
acting through the DOTC and MIAA.
In the present cases, the Court is again faced
with the task of resolving complicated issues
made difficult by their intersecting legal and
economic implications. The Court is aware of
the far reaching fall out effects of the ruling
which it makes today. For more than a
century and whenever the exigencies of the
times demand it, this Court has never shirked
from its solemn duty to dispense justice and
resolve "actual controversies involving rights
which
are
legally
demandable
and
enforceable, and to determine whether or not
there has been grave abuse of discretion
amounting
to
lack
or
excess
of
jurisdiction."6 To be sure, this Court will not
begin to do otherwise today.
We shall first dispose of the procedural
issues raised by respondent PIATCO which
they allege will bar the resolution of the
instant controversy.
Petitioners' Legal Standing to File
the present Petitions
a. G.R. Nos. 155001 and 155661
In G.R. No. 155001 individual petitioners are
employees
of
various
service

providers7 having
separate
concession
contracts with MIAA and continuing service
agreements with various international airlines
to provide in-flight catering, passenger
handling, ramp and ground support, aircraft
maintenance and provisions, cargo handling
and warehousing and other services. Also
included as petitioners are labor unions
MIASCOR Workers Union-National Labor Union
and Philippine Airlines Employees Association.
These petitioners filed the instant action for
prohibition as taxpayers and as parties whose
rights and interests stand to be violated by
the implementation of the PIATCO Contracts.
Petitioners-Intervenors in the same case are
all corporations organized and existing under
Philippine laws engaged in the business of
providing
in-flight
catering,
passenger
handling, ramp and ground support, aircraft
maintenance and provisions, cargo handling
and warehousing and other services to
several international airlines at the Ninoy
Aquino International Airport. PetitionersIntervenors allege
that as tax-paying
international
airline
and
airport-related
service operators, each one of them stands to
be irreparably injured by the implementation
of the PIATCO Contracts. Each of the
petitioners-intervenors have separate and
subsisting concession agreements with MIAA
and with various international airlines which
they allege are being interfered with and
violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute
employees
of
MIAA
and
Samahang
Manggagawa sa Paliparan ng Pilipinas - a
legitimate labor union and accredited as the
sole and exclusive bargaining agent of all the
employees in MIAA. Petitioners anchor their
petition for prohibition on the nullity of the
contracts entered into by the Government
and PIATCO regarding the build-operate-and-

transfer of the NAIA IPT III. They filed the

petition as taxpayers and persons who have a
legitimate interest to protect in the
implementation of the PIATCO Contracts.
Petitioners in both cases raise the argument
that the PIATCO Contracts contain stipulations
which
directly
contravene
numerous
provisions of the Constitution, specific
provisions of the BOT Law and its
Implementing Rules and Regulations, and
public policy. Petitioners contend that the
DOTC and the MIAA, by entering into said
contracts, have committed grave abuse of
discretion amounting to lack or excess of
jurisdiction which can be remedied only by a
writ of prohibition, there being no plain,
speedy or adequate remedy in the ordinary
course of law.
In particular, petitioners assail the provisions
in the 1997 Concession Agreement and the
ARCA which grant PIATCO the exclusive right
to operate a commercial international
passenger terminal within the Island of Luzon,
except those international airports already
existing at the time of the execution of the
agreement. The contracts further provide that
upon the commencement of operations at the
NAIA IPT III, the Government shall cause the
closure of Ninoy Aquino International Airport
Passenger Terminals I and II as international
passenger terminals. With respect to existing
concession agreements between MIAA and
international
airport
service
providers
regarding certain services or operations, the
1997 Concession Agreement and the ARCA
uniformly provide that such services or
operations will not be carried over to the NAIA
IPT III and PIATCO is under no obligation to
permit such carry over except through a
separate agreement duly entered into with
PIATCO.8

With respect to the petitioning service

providers and their employees, upon the
commencement of operations of the NAIA IPT
III, they allege that they will be effectively
barred from providing international airline
airport services at the NAIA Terminals I and II
as all international airlines and passengers
will be diverted to the NAIA IPT III. The
petitioning service providers will thus be
compelled to contract with PIATCO alone for
such services, with no assurance that
subsisting contracts with MIAA and other
international airlines will be respected.
Petitioning service providers stress that
despite the very competitive market, the
substantial capital investments required and
the high rate of fees, they entered into their
respective contracts with the MIAA with the
understanding that the said contracts will be
in force for the stipulated period, and
thereafter, renewed so as to allow each of the
petitioning service providers to recoup their
investments and obtain a reasonable return
thereon.
Petitioning employees of various service
providers at the NAIA Terminals I and II and of
MIAA on the other hand allege that with the
closure of the NAIA Terminals I and II as
international passenger terminals under the
PIATCO Contracts, they stand to lose
employment.

only that the law or any government act is

invalid, but also that he sustained or is in
imminent danger of sustaining some direct
injury as a result of its enforcement, and not
merely that he suffers thereby in some
indefinite way. It must appear that the person
complaining has been or is about to be
denied some right or privilege to which he is
lawfully entitled or that he is about to be
subjected to some burdens or penalties by
reason of the statute or act complained of.10
We hold that petitioners have the requisite
standing. In the above-mentioned cases,
petitioners have a direct and substantial
interest to protect by reason of the
implementation of the PIATCO Contracts. They
stand to lose their source of livelihood, a
property right which is zealously protected by
the
Constitution.
Moreover,
subsisting
concession agreements between MIAA and
petitioners-intervenors and service contracts
between international airlines and petitionersintervenors stand to be nullified or terminated
by the operation of the NAIA IPT III under the
PIATCO Contracts. The financial prejudice
brought about by the PIATCO Contracts on
petitioners and petitioners-intervenors in
these cases are legitimate interests sufficient
to confer on them the requisite standing to
file the instant petitions.
b. G.R. No. 155547

The question on legal standing is whether

such parties have "alleged such a personal
stake in the outcome of the controversy as to
assure that concrete adverseness which
sharpens the presentation of issues upon
which the court so largely depends for
illumination
of
difficult
constitutional
questions."9 Accordingly, it has been held that
the interest of a person assailing the
constitutionality of a statute must be direct
and personal. He must be able to show, not

In G.R. No. 155547, petitioners filed the

petition for prohibition as members of the
House of Representatives, citizens and
taxpayers. They allege that as members of
the House of Representatives, they are
especially interested in the PIATCO Contracts,
because
the
contracts
compel
the
Government
and/or
the
House
of
Representatives
to
appropriate
funds
necessary to comply with the provisions

therein.11 They cite provisions of the PIATCO

Contracts which require disbursement of
unappropriated amounts in compliance with
the
contractual
obligations
of
the
Government.
They
allege
that
the
Government obligations in the PIATCO
Contracts
which
compel
government
expenditure without appropriation is a
curtailment
of
their
prerogatives
as
legislators, contrary to the mandate of the
Constitution that "[n]o money shall be paid
out of the treasury except in pursuance of an
appropriation made by law."12
Standing
is
a
peculiar
concept
in
constitutional law because in some cases,
suits are not brought by parties who have
been personally injured by the operation of a
law or any other government act but by
concerned citizens, taxpayers or voters who
actually sue in the public interest. Although
we are not unmindful of the cases of Imus
Electric
Co.
v.
Municipality
of
Imus13 and Gonzales v. Raquiza14 wherein
this Court held that appropriation must be
made
only
on
amounts
immediately
demandable, public
interest
demands
that we take a more liberal view in
determining whether the petitioners
suing as legislators, taxpayers and
citizens have locus standi to file the
instant petition. In Kilosbayan, Inc. v.
Guingona,15 this Court held "[i]n line with the
liberal policy of this Court on locus
standi, ordinary taxpayers, members of
Congress, and even association of planters,
and non-profit civic organizations were
allowed to initiate and prosecute actions
before
this
Court
to
question
the
constitutionality or validity of laws, acts,
decisions, rulings, or orders of various
government
agencies
or
instrumentalities."16 Further,
"insofar
as
taxpayers' suits are concerned . . . (this

Court) is not devoid of discretion as to

whether or not it should be entertained." 17 As
such ". . . even if, strictly speaking, they [the
petitioners] are not covered by the definition,
it is still within the wide discretion of the
Court to waive the requirement and so
remove the impediment to its addressing and
resolving the serious constitutional questions
raised."18 In view of the serious legal
questions involved and their impact on public
interest, we resolve to grant standing to the
petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this
Court is without jurisdiction to review the
instant cases as factual issues are involved
which this Court is ill-equipped to resolve.
Moreover, PIATCO alleges that submission of
this controversy to this Court at the first
instance is a violation of the rule on hierarchy
of courts. They contend that trial courts have
concurrent jurisdiction with this Court with
respect to a special civil action for prohibition
and hence, following the rule on hierarchy of
courts, resort must first be had before the
trial courts.
After a thorough study and careful evaluation
of the issues involved, this Court is of the
view that the crux of the instant controversy
involves significant legal questions. The
facts necessary to resolve these legal
questions are well established and, hence,
need not be determined by a trial court.
The rule on hierarchy of courts will not also
prevent this Court from assuming jurisdiction
over the cases at bar. The said rule may be
relaxed when the redress desired cannot be
obtained in the appropriate courts or where
exceptional and compelling circumstances
justify availment of a remedy within and

calling for the exercise of this Court's primary

jurisdiction.19
It is easy to discern that exceptional
circumstances exist in the cases at bar that
call for the relaxation of the rule. Both
petitioners and respondents agree that these
cases are of transcendental importance as
they involve the construction and operation of
the country's premier international airport.
Moreover, the crucial issues submitted for
resolution are of first impression and they
entail the proper legal interpretation of key
provisions of the Constitution, the BOT Law
and its Implementing Rules and Regulations.
Thus, considering the nature of the
controversy before the Court, procedural bars
may be lowered to give way for the speedy
disposition of the instant cases.
Legal Effect of the Commencement
of Arbitration Proceedings by
PIATCO
There is one more procedural obstacle which
must be overcome. The Court is aware that
arbitration proceedings pursuant to Section
10.02 of the ARCA have been filed at the
instance of respondent PIATCO. Again, we
hold that the arbitration step taken by PIATCO
will not oust this Court of its jurisdiction over
the cases at bar.
In Del Monte Corporation-USA v. Court of
Appeals,20 even after finding that the
arbitration clause in the Distributorship
Agreement in question is valid and the
dispute between the parties is arbitrable, this
Court affirmed the trial court's decision
denying petitioner's Motion to Suspend
Proceedings pursuant to the arbitration clause

under the contract. In so ruling, this Court

held that as contracts produce legal effect
between the parties, their assigns and heirs,
only the parties to the Distributorship
Agreement are bound by its terms, including
the arbitration clause stipulated therein. This
Court ruled that arbitration proceedings could
be called for but only with respect to the
parties to the contract in question.
Considering that there are parties to the case
who are neither parties to the Distributorship
Agreement nor heirs or assigns of the parties
thereto, this Court, citing its previous ruling in
Salas, Jr. v. Laperal Realty Corporation, 21 held
that to tolerate the splitting of proceedings by
allowing arbitration as to some of the parties
on the one hand and trial for the others on
the other hand would, in effect, result
in multiplicity
of
suits,
duplicitous
procedure and unnecessary delay.22 Thus,
we ruled that the interest of justice would
best be served if the trial court hears and
adjudicates the case in a single and
complete proceeding.
It is established that petitioners in the
present
cases who
have
presented
legitimate interests in the resolution of the
controversy are not parties to the PIATCO
Contracts. Accordingly, they cannot be
bound by the arbitration clause provided for
in the ARCA and hence, cannot be compelled
to submit to arbitration proceedings. A
speedy and decisive resolution of all the
critical
issues
in
the
present
controversy, including those raised by
petitioners, cannot be made before an
arbitral tribunal. The object of arbitration is
precisely
to
allow
an
expeditious
determination of a dispute. This objective
would not be met if this Court were to allow
the parties to settle the cases by arbitration
as there are certain issues involving nonparties to the PIATCO Contracts which the

arbitral tribunal will not be equipped to

resolve.
Now, to the merits of the instant controversy.
I
Is PIATCO a qualified bidder?
Public respondents argue that the Paircargo
Consortium, PIATCO's predecessor, was not a
duly pre-qualified bidder on the unsolicited
proposal submitted by AEDC as the Paircargo
Consortium failed to meet the financial
capability required under the BOT Law and
the Bid Documents. They allege that in
computing the ability of the Paircargo
Consortium to meet the minimum equity
requirements for the project, the entire net
worth of Security Bank, a member of the
consortium, should not be considered.
PIATCO relies, on the other hand, on the
strength of the Memorandum dated October
14, 1996 issued by the DOTC Undersecretary
Primitivo C. Cal stating that the Paircargo
Consortium is found to have a combined net
worth of P3,900,000,000.00, sufficient to
meet the equity requirements of the project.
The said Memorandum was in response to a
letter from Mr. Antonio Henson of AEDC to
President Fidel V. Ramos questioning the
financial
capability
of
the
Paircargo
Consortium on the ground that it does not
have the financial resources to put up the
required
minimum
equity
of
P2,700,000,000.00. This contention is based
on the restriction under R.A. No. 337, as
amended or the General Banking Act that a
commercial bank cannot invest in any single
enterprise in an amount more than 15% of its
net worth. In the said Memorandum,
Undersecretary Cal opined:

The Bid Documents, as clarified

through Bid Bulletin Nos. 3 and 5,
require that financial capability will be
evaluated based on total financial
capability
of
all
the
member
companies
of
the
[Paircargo]
Consortium. In this connection, the
Challenger was found to have a
combined
net
worth
of
P3,926,421,242.00 that could support
a project costing approximately P13
Billion.
It is not a requirement that the net
worth must be "unrestricted." To
impose that as a requirement now will
be nothing less than unfair.
The financial statement or the net
worth is not the sole basis in
establishing financial capability. As
stated in Bid Bulletin No. 3, financial
capability may also be established by
testimonial letters issued by reputable
banks. The Challenger has complied
with this requirement.
To recap, net worth reflected in the
Financial Statement should not be
taken as the amount of the money to
be used to answer the required thirty
percent (30%) equity of the challenger
but rather to be used in establishing if
there is enough basis to believe that
the challenger can comply with the
required 30% equity. In fact, proof of
sufficient equity is required as one of
the conditions for award of contract
(Section 12.1 IRR of the BOT Law) but
not for pre-qualification (Section 5.4 of
the same document).23
Under the BOT Law, in case of a buildoperate-and-transfer arrangement, the

contract shall be awarded to the

bidder
"who,
having
satisfied
the minimum financial, technical,
organizational
and
legal
standards" required by the law, has
submitted the lowest bid and most
favorable
terms
of
the
project.24 Further,
the
1994
Implementing Rules and Regulations of
the BOT Law provide:
Section
5.4
Requirements.
xxx

xxx

Pre-qualification

xxx

c. Financial Capability: The project

proponent
must
have
adequate
capability to sustain the financing
requirements
for
the
detailed
engineering
design,
construction
and/or operation and maintenance
phases of the project, as the case may
be. For purposes of pre-qualification,
this capability shall be measured in
terms of (i) proof of the ability of
the project proponent and/or the
consortium to provide a minimum
amount of equity to the project,
and (ii) a letter testimonial from
reputable banks attesting that the
project
proponent
and/or
members of the consortium are
banking with them, that they are
in good financial standing, and
that
they
have
adequate
resources.
The
government
agency/LGU
concerned
shall
determine on a project-to-project basis
and before pre-qualification, the
minimum amount of equity needed.
(emphasis supplied)

Pursuant to this provision, the PBAC issued

PBAC Bulletin No. 3 dated August 16, 1996
amending
the
financial
capability
requirements for pre-qualification of the
project proponent as follows:
6. Basis of Pre-qualification
The basis for the pre-qualification shall
be on the compliance of the proponent
to the minimum technical and financial
requirements provided in the Bid
Documents and in the IRR of the BOT
Law, R.A. No. 6957, as amended by
R.A. 7718.
The minimum amount of equity to
which
the
proponent's
financial
capability will be based shall be thirty
percent (30%) of the project cost
instead of the twenty percent
(20%) specified in Section 3.6.4 of
the Bid Documents. This is to
correlate with the required debt-toequity ratio of 70:30 in Section 2.01a
of the draft concession agreement.
The debt portion of the project
financing should not exceed 70% of
the actual project cost.
Accordingly, based on the above provisions of
law, the Paircargo Consortium or any
challenger to the unsolicited proposal of
AEDC has to show that it possesses the
requisite financial capability to undertake
the project in the minimum amount of
30% of the project cost through (i) proof of
the ability to provide a minimum amount of
equity to the project, and (ii) a letter
testimonial from reputable banks attesting
that the project proponent or members of the
consortium are banking with them, that they
are in good financial standing, and that they
have adequate resources.

As the minimum project cost was estimated

to
be
US$350,000,000.00
or
roughly
P9,183,650,000.00,25 the
Paircargo
Consortium had to show to the satisfaction of
the PBAC that it had the ability to provide the
minimum equity for the project in the amount
of at least P2,755,095,000.00.
Paircargo's Audited Financial Statements as of
1993 and 1994 indicated that it had a net
worth of P2,783,592.00 and P3,123,515.00
respectively.26 PAGS'
Audited
Financial
Statements as of 1995 indicate that it has
approximately P26,735,700.00 to invest as its
equity for the project.27 Security Bank's
Audited Financial Statements as of 1995 show
that it has a net worth equivalent to its
capital
funds
in
the
amount
of
P3,523,504,377.00.28
We agree with public respondents that with
respect
to
Security
Bank,
the entire
amount of its net worth could not be
invested in a single undertaking or enterprise,
whether allied or non-allied in accordance
with the provisions of R.A. No. 337, as
amended or the General Banking Act:
Sec. 21-B. The provisions in this or in
any other Act to the contrary
notwithstanding, the Monetary Board,
whenever it shall deem appropriate
and necessary to further national
development objectives or support
national
priority
projects, may
authorize a commercial bank, a
bank
authorized
to
provide
commercial banking services, as
well as a government-owned and
controlled bank, to operate under
an expanded commercial banking
authority and by virtue thereof
exercise, in addition to powers
authorized for commercial banks,

the powers of an Investment

House as provided in Presidential
Decree No. 129, invest in the
equity
of
a
non-allied
undertaking, or own a majority or all
of
the
equity
in
a
financial
intermediary other than a commercial
bank or a bank authorized to provide
commercial
banking
services: Provided, That (a) the total
investment in equities shall not exceed
fifty percent (50%) of the net worth of
the bank; (b) the equity investment
in any one enterprise whether
allied or non-allied shall not
exceed fifteen percent (15%) of
the net worth of the bank; (c) the
equity investment of the bank, or of its
wholly or majority-owned subsidiary, in
a single non-allied undertaking shall
not exceed thirty-five percent (35%) of
the total equity in the enterprise nor
shall it exceed thirty-five percent
(35%) of the voting stock in that
enterprise;
and
(d)
the
equity
investment in other banks shall be
deducted from the investing bank's
net worth for purposes of computing
the prescribed ratio of net worth to
risk assets.
xxx

xxx

xxx

Further, the 1993 Manual of Regulations for

Banks provides:
SECTION X383. Other Limitations and
Restrictions.

The
following
limitations and restrictions shall also
apply regarding equity investments of
banks.
a. In any single enterprise. The
equity investments of banks in any

single enterprise shall not exceed at

any time fifteen percent (15%) of the
net worth of the investing bank as
defined in Sec. X106 and Subsec.
X121.5.
Thus, the maximum amount that Security
Bank could validly invest in the Paircargo
Consortium
is
only
P528,525,656.55,
representing 15% of its entire net worth. The
total net worth therefore of the Paircargo
Consortium, after considering the maximum
amounts that may be validly invested by
each of its members isP558,384,871.55 or
only 6.08% of the project cost, 29 an
amount substantially less than the prescribed
minimum equity investment required for the
project in the amount of P2,755,095,000.00
or 30% of the project cost.
The purpose of pre-qualification in any public
bidding is to determine, at the earliest
opportunity, the ability of the bidder to
undertake the project. Thus, with respect to
the bidder's financial capacity at the prequalification stage, the law requires the
government
agency
to
examine
and
determine the ability of the bidder to fund the
entire cost of the project by considering the
maximum amounts that each bidder may
invest in the project at the time of prequalification.
The PBAC has determined that any
prospective bidder for the construction,
operation and maintenance of the NAIA IPT III
project should prove that it has the ability to
provide equity in the minimum amount of
30% of the project cost, in accordance with
the 70:30 debt-to-equity ratio prescribed in
the Bid Documents. Thus, in the case of
Paircargo Consortium, the PBAC should
determine
the maximum
amounts that
each member of the consortium may commit

for
the
construction,
operation
and
maintenance of the NAIA IPT III project at the
time of pre-qualification. With respect to
Security Bank, the maximum amount which
may be invested by it would only be 15% of
its net worth in view of the restrictions
imposed by the General Banking Act.
Disregarding the investment ceilings provided
by applicable law would not result in a proper
evaluation of whether or not a bidder is prequalified to undertake the project as for all
intents and purposes, such ceiling or legal
restriction determines the true maximum
amount which a bidder may invest in the
project.
Further, the determination of whether or not a
bidder is pre-qualified to undertake the
project requires an evaluation of the financial
capacity of the said bidder at the time the
bid is submitted based on the required
documents presented by the bidder. The
PBAC should not be allowed to speculate on
the future financial abilityof the bidder to
undertake the project on the basis of
documents submitted. This would open doors
to abuse and defeat the very purpose of a
public bidding. This is especially true in the
case at bar which involves the investment of
billions of pesos by the project proponent.
The relevant government authority is dutybound to ensure that the awardee of the
contract possesses the minimum required
financial capability to complete the project. To
allow the PBAC to estimate the bidder's future
financial capability would not secure the
viability and integrity of the project. A
restrictive and conservative application of the
rules and procedures of public bidding is
necessary not only to protect the impartiality
and regularity of the proceedings but also to
ensure the financial and technical reliability of
the project. It has been held that:

The basic rule in public bidding is that

bids should be evaluated based on the
required documents submitted before
and not after the opening of bids.
Otherwise, the foundation of a fair and
competitive public bidding would be
defeated. Strict observance of the
rules, regulations, and guidelines
of the bidding process is the only
safeguard to a fair, honest and
competitive public bidding.30
Thus,
if
the maximum
amount
of
equity that a bidder may invest in the
project at
the
time
the
bids
are
submitted falls short of the minimum
amounts required to be put up by the bidder,
said bidder should be properly disqualified.
Considering that at the pre-qualification
stage, the maximum amounts which the
Paircargo Consortium may invest in the
project fell short of the minimum amounts
prescribed by the PBAC, we hold that
Paircargo Consortium was not a qualified
bidder. Thus the award of the contract by the
PBAC to the Paircargo Consortium, a
disqualified bidder, is null and void.
While it would be proper at this juncture to
end the resolution of the instant controversy,
as the legal effects of the disqualification of
respondent PIATCO's predecessor would come
into play and necessarily result in the nullity
of all the subsequent contracts entered by it
in pursuance of the project, the Court feels
that it is necessary to discuss in full the
pressing issues of the present controversy for
a complete resolution thereof.
II
Is the 1997 Concession Agreement valid?

Petitioners and public respondents contend

that the 1997 Concession Agreement is
invalid as it contains provisions that
substantially
depart
from
the
draft
Concession Agreement included in the Bid
Documents. They maintain that a substantial
departure
from
the
draft
Concession
Agreement is a violation of public policy and
renders the 1997 Concession Agreement null
and void.
PIATCO
maintains,
however,
that
the
Concession Agreement attached to the Bid
Documents is intended to be adraft, i.e.,
subject to change, alteration or modification,
and that this intention was clear to all
participants, including AEDC, and DOTC/MIAA.
It argued further that said intention is
expressed in Part C (6) of Bid Bulletin No. 3
issued by the PBAC which states:
6. Amendments
to
Concessions Agreement

the

Draft

Amendments to the Draft Concessions

Agreement shall be issued from time
to time. Said amendments shall only
cover items that would not materially
affect
the
preparation
of
the
proponent's proposal.
By its very nature, public bidding aims to
protect the public interest by giving the public
the best possible advantages through open
competition. Thus:
Competition must be legitimate, fair
and honest. In the field of government
contract law, competition requires, not
only `bidding upon a common
standard, a common basis, upon the
same thing, the same subject matter,
the same undertaking,' but also that

it be legitimate, fair and honest;

and not designed to injure or
defraud the government.31
An essential element of a publicly bidded
contract is that all bidders must be on equal
footing. Not simply in terms of application of
the procedural rules and regulations imposed
by the relevant government agency, but more
importantly, on the contract bidded upon.
Each bidder must be able to bid on the same
thing. The rationale is obvious. If the winning
bidder is allowed to later include or modify
certain provisions in the contract awarded
such that the contract is altered in any
material respect, then the essence of fair
competition in the public bidding is
destroyed. A public bidding would indeed be a
farce if after the contract is awarded, the
winning bidder may modify the contract and
include provisions which are favorable to it
that were not previously made available to
the other bidders. Thus:
It is inherent in public biddings that
there shall be a fair competition
among the bidders. The specifications
in such biddings provide the common
ground or basis for the bidders. The
specifications
should,
accordingly,
operate equally or indiscriminately
upon all bidders.32
The same rule was restated by Chief Justice
Stuart of the Supreme Court of Minnesota:
The law is well settled that where, as
in this case, municipal authorities can
only let a contract for public work to
the lowest responsible bidder, the
proposals and specifications therefore
must be so framed as to permit free
and full competition. Nor can they
enter into a contract with the best

bidder
containing
substantial
provisions beneficial to him, not
included or contemplated in the
terms and specifications upon
which the bids were invited.33
In fact, in the PBAC Bid Bulletin No. 3 cited by
PIATCO to support its argument that the draft
concession
agreement
is
subject
to
amendment, the pertinent portion of which
was quoted above, the PBAC also clarified
that"[s]aid amendments shall only cover
items that would not materially affect
the preparation of the proponent's
proposal."
While we concede that a winning bidder is not
precluded from modifying or amending
certain provisions of the contract bidded
upon, such changes must not constitute
substantial or material amendments
that would alter the basic parameters of
the contract and would constitute a
denial to the other bidders of the
opportunity to bid on the same terms.
Hence, the determination of whether or not a
modification or amendment of a contract
bidded
out
constitutes
a
substantial
amendment rests on whether the contract,
when taken as a whole, would contain
substantially different terms and conditions
that would have the effect of altering the
technical and/or financial proposals previously
submitted by other bidders. The alterations
and modifications in the contract executed
between the government and the winning
bidder must be such as to render such
executed
contract
to
be an
entirely
different contract from the one that was
bidded upon.
In the case of Caltex (Philippines), Inc. v.
Delgado Brothers, Inc.,34 this Court quoted
with approval the ruling of the trial court that

an amendment to a contract awarded through

public bidding, when such subsequent
amendment was made without a new public
bidding, is null and void:
The Court agrees with the contention
of counsel for the plaintiffs that the
due execution of a contract after
public bidding is a limitation upon the
right of the contracting parties to alter
or amend it without another public
bidding, for otherwise what would a
public bidding be good for if after
the execution of a contract after
public bidding, the contracting
parties may alter or amend the
contract, or even cancel it, at
their will? Public biddings are held for
the protection of the public, and to
give the public the best possible
advantages by means of open
competition between the bidders. He
who bids or offers the best terms is
awarded the contract subject of the
bid, and it is obvious that such
protection
and
best
possible
advantages
to
the
public
will
disappear if the parties to a contract
executed after public bidding may
alter or amend it without another
previous public bidding.35
Hence, the question that comes to fore is this:
is the 1997 Concession Agreement the same
agreement that was offered for public
bidding, i.e., the draft Concession Agreement
attached to the Bid Documents? A close
comparison
of
the
draft
Concession
Agreement attached to the Bid Documents
and the 1997 Concession Agreement reveals
that the documents differ in at least two
material respects:
a. Modification on the Public

Utility Revenues and Non-Public

(3) groundhandling fees;

Utility Revenues that may be

(4) rentals and airline offices;

collected by PIATCO

(5) check-in counter rentals; and

The fees that may be imposed and collected

by PIATCO under the draft Concession
Agreement and the
1997 Concession
Agreement may be classified into three
distinct categories: (1) fees which are subject
to periodic adjustment of once every two
years in accordance with a prescribed
parametric formula and adjustments are
made effective only upon written approval by
MIAA; (2) fees other than those included in
the first category which maybe adjusted by
PIATCO whenever it deems necessary without
need for consent of DOTC/MIAA; and (3) new
fees and charges that may be imposed by
PIATCO which have not been previously
imposed or collected at the Ninoy Aquino
International Airport Passenger Terminal I,
pursuant to Administrative Order No. 1, Series
of 1993, as amended. The glaring distinctions
between the draft Concession Agreement and
the 1997 Concession Agreement lie in the
types of fees included in each category and
the extent of the supervision and regulation
which MIAA is allowed to exercise in relation
thereto.

(6) porterage fees.

For fees under the first category, i.e., those

which are subject to periodic adjustment in
accordance with a prescribed parametric
formula and effective only upon written
approval by MIAA, the draft Concession
Agreement includes the following:36
(1) aircraft parking fees;
(2) aircraft tacking fees;

Under the 1997 Concession Agreement,

fees which are subject to adjustment and
effective upon MIAA approval are classified as
"Public Utility Revenues" and include:37
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) check-in counter fees; and
(4) Terminal Fees.
The implication of the reduced number of fees
that are subject to MIAA approval is best
appreciated in relation to fees included in
the second
category identified
above.
Under
the 1997
Concession
Agreement, fees which PIATCO may adjust
whenever it deems necessary without need
for consent of DOTC/MIAA are "Non-Public
Utility Revenues" and is defined as "all other
income not classified as Public Utility
Revenues derived from operations of the
Terminal and the Terminal Complex."38 Thus,
under the 1997 Concession Agreement,
ground handling fees, rentals from airline
offices and porterage fees are no longer
subject to MIAA regulation.
Further, under Section 6.03 of the draft
Concession Agreement, MIAA reserves the
right to regulate (1) lobby and vehicular
parking fees and (2) other new fees and

charges that may be imposed by PIATCO.

Such regulation may be made by periodic
adjustment and is effective only upon written
approval of MIAA. The full text of said
provision is quoted below:
Section 6.03. Periodic Adjustment in
Fees and Charges. Adjustments in the
aircraft parking fees, aircraft tacking
fees, groundhandling fees, rentals and
airline offices, check-in-counter rentals
and porterage fees shall be allowed
only once every two years and in
accordance
with
the
Parametric
Formula attached hereto as Annex F.
Provided that adjustments shall be
made effective only after the written
express approval of the MIAA.
Provided, further, that such approval
of the MIAA, shall be contingent only
on the conformity of the adjustments
with the above said parametric
formula. The first adjustment shall be
made prior to the In-Service Date of
the Terminal.
The MIAA reserves the right to
regulate under the foregoing
terms and conditions the lobby
and vehicular parking fees and
other new fees and charges as
contemplated in paragraph 2 of
Section 6.01 if in its judgment the
users of the airport shall be
deprived of a free option for the
services they cover.39
On the other hand, the equivalent provision
under
the 1997
Concession
Agreement reads:
Section 6.03 Periodic Adjustment in
Fees and Charges.

xxx

xxx

xxx

(c) Concessionaire shall at all times be

judicious in fixing fees and charges
constituting
Non-Public
Utility
Revenues in order to ensure that End
Users are not unreasonably deprived
of services. While the vehicular
parking fee, porterage fee and
greeter/well wisher fee constitute
Non-Public Utility Revenues of
Concessionaire,
GRP
may
intervene
and
require
Concessionaire to explain and
justify the fee it may set from
time to time, if in the reasonable
opinion of GRP the said fees have
become exorbitant resulting in the
unreasonable deprivation of End Users
of such services.40
Thus,
under
the 1997
Concession
Agreement, with respect to (1) vehicular
parking fee, (2) porterage fee and (3)
greeter/well wisher fee, all that MIAA can do
is to require PIATCO to explain and
justify the fees set by PIATCO. In the draft
Concession Agreement, vehicular parking
fee is subject to MIAA regulation and approval
under the second paragraph of Section 6.03
thereof while porterage fee is covered by the
first paragraph of the same provision. There is
an obvious relaxation of the extent of control
and regulation by MIAA with respect to the
particular fees that may be charged by
PIATCO.
Moreover,
with
respect
to
the third
category of fees that may be imposed and
collected by PIATCO, i.e., new fees and
charges that may be imposed by PIATCO
which have not been previously imposed or
collected at the Ninoy Aquino International
Airport Passenger Terminal I, under Section

6.03
of
the draft
Concession
AgreementMIAA has reserved the right to
regulate the same under the same conditions
that MIAA may regulate fees under the first
category, i.e., periodic adjustment of once
every two years in accordance with a
prescribed parametric formula and effective
only upon written approval by MIAA. However,
under
the 1997
Concession
Agreement,adjustment of fees under the
third category is not subject to MIAA
regulation.
With respect to terminal fees that may be
charged by PIATCO,41 as shown earlier, this
was included within the category of "Public
Utility Revenues" under the 1997 Concession
Agreement. This classification is significant
because
under
the 1997
Concession
Agreement, "Public Utility Revenues" are
subject to an "Interim Adjustment" of fees
upon the occurrence of certain extraordinary
events specified in the agreement. 42 However,
under
the draft
Concession
Agreement, terminal fees are not included in
the types of fees that may be subject to
"Interim Adjustment."43
Finally,
under
the 1997
Concession
Agreement, "Public
Utility
Revenues,"
except terminal fees, are denominated in US
Dollars44 while payments to the Government
are in Philippine Pesos. In the draft
Concession Agreement, no such stipulation
was included. By stipulating that "Public
Utility Revenues" will be paid to PIATCO in US
Dollars while payments by PIATCO to the
Government are in Philippine currency under
the 1997 Concession Agreement, PIATCO is
able to enjoy the benefits of depreciations of
the Philippine Peso, while being effectively
insulated from the detrimental effects of
exchange rate fluctuations.

When taken as a whole, the changes under

the 1997 Concession Agreement with respect
to reduction in the types of fees that are
subject to MIAA regulation and the relaxation
of such regulation with respect to other fees
are significant amendments that substantially
distinguish the draft Concession Agreement
from the 1997 Concession Agreement. The
1997 Concession Agreement, in this
respect, clearly gives PIATCO more
favorable terms than what was available
to other bidders at the time the contract
was bidded out. It is not very difficult to see
that the changes in the 1997 Concession
Agreement translate to direct and concrete
financial advantages for PIATCO which
were not available at the time the contract
was offered for bidding. It cannot be denied
that under the 1997 Concession Agreement
only "Public Utility Revenues" are subject to
MIAA regulation. Adjustments of all other fees
imposed and collected by PIATCO are entirely
within its control. Moreover, with respect to
terminal fees, under the 1997 Concession
Agreement, the same is further subject to
"Interim
Adjustments"
not
previously
stipulated in the draft Concession Agreement.
Finally, the change in the currency stipulated
for "Public Utility Revenues" under the 1997
Concession Agreement, except terminal fees,
gives PIATCO an added benefit which was not
available at the time of bidding.
b. Assumption by the
Government of the liabilities of
PIATCO in the event of the latter's
default thereof
Under
the draft
Concession
Agreement, default by PIATCO of any of its

obligations to creditors who have provided,

loaned or advanced funds for the NAIA IPT III
project does not result in the assumption by
the Government of these liabilities. In fact,
nowhere in the said contract does default of
PIATCO's loans figure in the agreement. Such
default does not directly result in any
concomitant right or obligation in favor of the
Government.
However,
the 1997
Agreement provides:

Concession

Section 4.04 Assignment.

xxx

xxx

xxx

(b) In the event Concessionaire should

default in the payment of an Attendant
Liability, and the default has resulted
in the acceleration of the payment due
date of the Attendant Liability prior to
its stated date of maturity, the Unpaid
Creditors and Concessionaire shall
immediately inform GRP in writing of
such default. GRP shall, within one
hundred eighty (180) Days from
receipt of the joint written notice of
the
Unpaid
Creditors
and
Concessionaire, either (i) take over the
Development Facility and assume the
Attendant Liabilities, or (ii) allow the
Unpaid Creditors, if qualified, to be
substituted as concessionaire and
operator of the Development Facility in
accordance with the terms and
conditions hereof, or designate a
qualified operator acceptable to GRP
to operate the Development Facility,
likewise
under
the
terms
and
conditions of this Agreement; Provided
that if at the end of the 180-day period
GRP shall not have served the Unpaid
Creditors and Concessionaire written

notice of its choice, GRP

deemed to have elected to
the Development Facility
concomitant assumption of
Liabilities.

shall be
take over
with the
Attendant

(c) If GRP should, by written notice,

allow the Unpaid Creditors to be
substituted as concessionaire, the
latter shall form and organize a
concession company qualified to take
over the operation of the Development
Facility. If the concession company
should elect to designate an operator
for the Development Facility, the
concession company shall in good
faith identify and designate a qualified
operator acceptable to GRP within one
hundred eighty (180) days from
receipt of GRP's written notice. If the
concession company, acting in good
faith and with due diligence, is unable
to designate a qualified operator
within the aforesaid period, then GRP
shall at the end of the 180-day period
take over the Development Facility
and assume Attendant Liabilities.
The term "Attendant Liabilities" under
the 1997 Concession Agreement is defined
as:
Attendant Liabilities refer to all
amounts recorded and from time to
time outstanding in the books of the
Concessionaire as owing to Unpaid
Creditors who have provided,
loaned or advanced funds actually
used for the Project, including all
interests, penalties, associated fees,
charges,
surcharges,
indemnities,
reimbursements and other related
expenses,
and
further
including
amounts owed by Concessionaire to its

suppliers,
contractors
contractors.

and

sub-

Under the above quoted portions of Section

4.04 in relation to the definition of "Attendant
Liabilities," default by PIATCO of its loans
used to finance the NAIA IPT III project
triggers the occurrence of certain events
that leads to the assumption by the
Government of the liability for the loans.
Only in one instance may the Government
escape the assumption of PIATCO's liabilities,
i.e., when the Government so elects and
allows a qualified operator to take over as
Concessionaire. However,
this
circumstance is dependent on the
existence and availability of a qualified
operator who is willing to take over the
rights and obligations of PIATCO under
the contract, a circumstance that is not
entirely within the control of the
Government.
Without going into the validity of this
provision at this juncture, suffice it to state
that Section 4.04 of the 1997 Concession
Agreement may be considered a form of
security for the loans PIATCO has obtained to
finance the project, an option that was not
made available in the draft Concession
Agreement. Section 4.04 is an important
amendment
to
the
1997
Concession
Agreement
because
it
grants
PIATCO
a financial advantage or benefit which
was not previously made available
during the bidding process. This financial
advantage is a significant modification that
translates to better terms and conditions for
PIATCO.
PIATCO, however, argues that the parties to
the bidding procedure acknowledge that the
draft Concession Agreement is subject to
amendment because the Bid Documents

permit financing or borrowing. They claim

that it was the lenders who proposed the
amendments to the draft Concession
Agreement which resulted in the 1997
Concession Agreement.

policy on public bidding. A strict adherence on

the principles, rules and regulations on public
bidding must be sustained if only to preserve
the integrity and the faith of the general
public on the procedure.

We agree that it is not inconsistent with the

rationale and purpose of the BOT Law to allow
the project proponent or the winning bidder
to obtain financing for the project, especially
in this case which involves the construction,
operation and maintenance of the NAIA IPT III.
Expectedly, compliance by the project
proponent of its undertakings therein would
involve a substantial amount of investment. It
is therefore inevitable for the awardee of the
contract to seek alternate sources of funds to
support the project. Be that as it may, this
Court maintains that amendments to the
contract bidded upon should always conform
to the general policy on public bidding if such
procedure is to be faithful to its real nature
and purpose. By its very nature and
characteristic, competitive public bidding
aims to protect the public interest by giving
the public the best possible advantages
through open competition.45 It has been held
that the three principles in public bidding are
(1) the offer to the public; (2) opportunity for
competition; and (3) a basis for the exact
comparison of bids. A regulation of the matter
which excludes any of these factors destroys
the distinctive character of the system and
thwarts the purpose of its adoption.46 These
are the basic parameters which every
awardee of a contract bidded out must
conform to, requirements of financing and
borrowing notwithstanding. Thus, upon a
concrete showing that, as in this case, the
contract signed by the government and the
contract-awardee is an entirely different
contract from the contract bidded, courts
should not hesitate to strike down said
contract in its entirety for violation of public

Public bidding is a standard practice for

procuring government contracts for public
service and for furnishing supplies and other
materials. It aims to secure for the
government the lowest possible price under
the most favorable terms and conditions, to
curtail favoritism in the award of government
contracts and avoid suspicion of anomalies
and it places all bidders in equal
footing.47 Any government action which
permits
any
substantial
variance
between the conditions under which the
bids are invited and the contract
executed after the award thereof is a
grave abuse of discretion amounting to
lack or excess of jurisdiction which
warrants proper judicial action.
In view of the above discussion, the fact that
the foregoing substantial amendments were
made
on
the 1997
Concession
Agreement renders the same null and void
for being contrary to public policy. These
amendments convert the 1997 Concession
Agreement
to
an entirely
different
agreement from the contract bidded out or
the draft Concession Agreement. It is not
difficult to see that the amendments on (1)
the types of fees or charges that are subject
to MIAA regulation or control and the extent
thereof and (2) the assumption by the
Government, under certain conditions, of the
liabilities of PIATCO directly translates
concrete financial advantages to PIATCO
that were previously not available
during the bidding process. These
amendments cannot be taken as merely
supplements to or implementing provisions of

those already existing in the draft Concession

Agreement. The amendments discussed
above present new terms and conditions
which provide financial benefit to PIATCO
which may have altered the technical and
financial parameters of other bidders had
they known that such terms were available.
III
Direct Government Guarantee
Article IV, Section 4.04(b) and (c), in relation
to Article 1.06, of the 1997 Concession
Agreement provides:
Section 4.04 Assignment
xxx

xxx

xxx

(b) In the event Concessionaire

should default in the payment of
an Attendant Liability, and the
default resulted in the acceleration of
the payment due date of the
Attendant Liability prior to its stated
date of maturity, the Unpaid Creditors
and Concessionaire shall immediately
inform GRP in writing of such default.
GRP shall within one hundred eighty
(180) days from receipt of the joint
written notice of the Unpaid Creditors
and Concessionaire, either (i) take
over
the
Development
Facility
and assume
the
Attendant
Liabilities, or (ii) allow the Unpaid
Creditors, if qualified to be substituted
as concessionaire and operator of the
Development facility in accordance
with the terms and conditions hereof,
or designate a qualified operator
acceptable to GRP to operate the
Development Facility, likewise under

the terms and conditions of this

Agreement; Provided, that if at the end
of the 180-day period GRP shall not
have served the Unpaid Creditors and
Concessionaire written notice of its
choice, GRP shall be deemed to
have elected to take over the
Development Facility with the
concomitant
assumption
of
Attendant Liabilities.
(c) If GRP, by written notice, allow the
Unpaid Creditors to be substituted as
concessionaire, the latter shall form
and organize a concession company
qualified to takeover the operation of
the Development Facility. If the
concession company should elect to
designate
an
operator
for
the
Development Facility, the concession
company shall in good faith identify
and designate a qualified operator
acceptable to GRP within one hundred
eighty (180) days from receipt of
GRP's written notice. If the concession
company, acting in good faith and with
due diligence, is unable to designate a
qualified operator within the aforesaid
period, then GRP shall at the end of
the 180-day period take over the
Development Facility and assume
Attendant Liabilities.
.
Section 1.06. Attendant Liabilities
Attendant
Liabilities
refer
to all
amounts recorded and from time
to time outstanding in the books
of the Concessionaire as owing to
Unpaid
Creditors who
have
provided, loaned or advanced funds
actually used for the Project, including

all interests, penalties, associated

fees, charges, surcharges, indemnities,
reimbursements and other related
expenses,
and
further
including
amounts owed by Concessionaire to its
suppliers,
contractors
and
subcontractors.48
It is clear from the above-quoted provisions
that Government, in the event that
PIATCO defaults in its loan obligations,
is obligated to pay "all amounts recorded
and from time to time outstanding from the
books" of PIATCO which the latter owes to its
creditors.49 These
amounts
include
"all
interests, penalties, associated fees, charges,
surcharges, indemnities, reimbursements and
other related expenses."50 This obligation of
the Government to pay PIATCO's creditors
upon PIATCO's default would arise if the
Government opts to take over NAIA IPT III. It
should be noted, however, that even if the
Government chooses the second option,
which is to allow PIATCO's unpaid creditors
operate NAIA IPT III, the Government is still at
a risk of being liable to PIATCO's creditors
should the latter be unable to designate a
qualified operator within the prescribed
period.51 In effect,whatever option the
Government chooses to take in the
event of PIATCO's failure to fulfill its
loan obligations, the Government is still
at
a
risk
of
assuming
PIATCO's
outstanding loans. This is due to the fact
that the Government would only be free from
assuming PIATCO's debts if the unpaid
creditors would be able to designate a
qualified operator within the period provided
for in the contract. Thus, the Government's
assumption of liability is virtually out of
its control. The Government under the
circumstances provided for in the 1997
Concession Agreement is at the mercy of the
existence, availability and willingness of a

qualified operator. The above contractual

provisions constitute a direct government
guarantee which is prohibited by law.
One of the main impetus for the enactment of
the BOT Law is the lack of government funds
to
construct
the
infrastructure
and
development projects necessary for economic
growth and development. This is why private
sector resources are being tapped in order to
finance these projects. The BOT law allows
the private sector to participate, and is in fact
encouraged to do so by way of incentives,
such as minimizing the unstable flow of
returns,52 provided that the government
would not have to unnecessarily expend
scarcely available funds for the project itself.
As such, direct guarantee, subsidy and equity
by the government in these projects are
strictly prohibited.53 This is but logical for if
the government would in the end still be
at a risk of paying the debts incurred by
the private entity in the BOT projects,
then the purpose of the law is
subverted.
Section 2(n) of the BOT Law defines direct
guarantee as follows:
(n) Direct government guarantee An
agreement whereby the government
or any of its agencies or local
government
units
assume
responsibility for the repayment of
debt directly incurred by the
project proponent in implementing
the project in case of a loan default.
Clearly by providing that the Government
"assumes" the attendant liabilities, which
consists of PIATCO's unpaid debts, the 1997
Concession Agreement provided for a direct
government guarantee for the debts incurred
by PIATCO in the implementation of the NAIA

IPT III project. It is of no moment that the

relevant sections are subsumed under the
title of "assignment". The provisions providing
for direct government guarantee which is
prohibited by law is clear from the terms
thereof.
The fact that the ARCA superseded the 1997
Concession Agreement did not cure this fatal
defect. Article IV, Section 4.04(c), in relation
to Article I, Section 1.06, of the ARCA
provides:
Section 4.04 Security
xxx

xxx

xxx

(c) GRP agrees with Concessionaire

(PIATCO) that it shall negotiate in
good faith and enter into direct
agreement
with
the
Senior
Lenders, or with an agent of such
Senior Lenders (which agreement shall
be subject to the approval of the
Bangko Sentral ng Pilipinas), in such
form as may be reasonably acceptable
to both GRP and Senior Lenders, with
regard, inter alia, to the following
parameters:
xxx

xxx

xxx

(iv) If the
Concessionaire [PIATCO] is in
default under a payment
obligation owed to the
Senior Lenders, and as a
result
thereof
the
Senior
Lenders have become entitled
to accelerate the Senior Loans,
the Senior Lenders shall have
the right to notify GRP of the
same, and without prejudice to

any other rights of the Senior

Lenders or any Senior Lenders'
agent may have (including
without
limitation
under
security interests granted in
favor of the Senior Lenders), to
either in good faith identify and
designate a nominee which is
qualified under sub-clause (viii)
(y) below to operate the
Development
Facility
[NAIA
Terminal 3] or transfer the
Concessionaire's
[PIATCO]
rights and obligations under
this Agreement to a transferee
which is qualified under subclause (viii) below;
xxx

xxx

xxx

(vi) if the Senior Lenders,

acting in good faith and using
reasonable efforts, are unable
to designate a nominee or
effect a transfer in terms and
conditions satisfactory to the
Senior Lenders within one
hundred eighty (180) days after
giving GRP notice as referred to
respectively in (iv) or (v) above,
then GRP and the Senior
Lenders shall endeavor in good
faith to enter into any other
arrangement relating to the
Development
Facility
[NAIA
Terminal 3] (other than a
turnover of the Development
Facility [NAIA Terminal 3] to
GRP) within the following one
hundred eighty (180) days. If
no agreement relating to the
Development
Facility
[NAIA
Terminal 3] is arrived at by GRP
and the Senior Lenders within

the said 180-day period, then

at
the
end
thereof
the Development
Facility
[NAIA Terminal 3] shall be
transferred
by
the
Concessionaire [PIATCO] to
GRP or its designee and
GRP
shall
make
a
termination
payment
to
Concessionaire
[PIATCO]
equal to the Appraised
Value
(as
hereinafter
defined)
of
the
Development Facility [NAIA
Terminal 3] or the sum of
the Attendant Liabilities, if
greater.
Notwithstanding
Section 8.01(c) hereof, this
Agreement shall be deemed
terminated upon the transfer of
the Development Facility [NAIA
Terminal 3] to GRP pursuant
hereto;
xxx

xxx

xxx

Section 1.06. Attendant Liabilities

Attendant Liabilities refer to all
amounts in each case supported by
verifiable evidence from time to
timeowed or which may become
owing by Concessionaire [PIATCO]
to Senior Lenders or any other
persons
or
entities
who have
provided, loaned, or advanced funds
or provided financial facilities to
Concessionaire [PIATCO] for the
Project [NAIA Terminal 3], including,
without limitation, all principal,
interest, associated fees, charges,
reimbursements,
and
other
related
expenses (including
the
fees, charges and expenses of any

agents or trustees of such persons or

entities), whether payable at maturity,
by acceleration or otherwise, and
further including amounts owed by
Concessionaire
[PIATCO]
to
its
professional consultants and advisers,
suppliers,
contractors
and
subcontractors.54
It is clear from the foregoing contractual
provisions that in the event that PIATCO fails
to fulfill its loan obligations to its Senior
Lenders, the Government is obligated to
directly negotiate and enter into an
agreement relating to NAIA IPT III with the
Senior Lenders, should the latter fail to
appoint a qualified nominee or transferee who
will take the place of PIATCO. If the Senior
Lenders and the Government are unable to
enter into an agreement after the prescribed
period, the Government must then pay
PIATCO, upon transfer of NAIA IPT III to the
Government, termination payment equal to
the appraised value of the project or the
value
of
the
attendant
liabilities
whichever is greater. Attendant liabilities
as defined in the ARCA includes all amounts
owed or thereafter may be owed by PIATCO
not only to the Senior Lenders with whom
PIATCO has defaulted in its loan obligations
but to all other persons who may have
loaned, advanced funds or provided any other
type of financial facilities to PIATCO for NAIA
IPT III. The amount of PIATCO's debt that the
Government would have to pay as a result of
PIATCO's default in its loan obligations -- in
case no qualified nominee or transferee is
appointed by the Senior Lenders and no other
agreement relating to NAIA IPT III has been
reached between the Government and the
Senior Lenders -- includes, but is not limited
to, "all principal, interest, associated fees,
charges, reimbursements, and other related

expenses . . . whether payable at maturity, by

acceleration or otherwise."55
It is clear from the foregoing that the
ARCA provides for a direct guarantee by
the government to pay PIATCO's loans
not only to its Senior Lenders but all
other entities who provided PIATCO
funds or services upon PIATCO's default
in its loan obligation with its Senior
Lenders. The fact that the Government's
obligation to pay PIATCO's lenders for the
latter's obligation would only arise after the
Senior Lenders fail to appoint a qualified
nominee or transferee does not detract from
the fact that, should the conditions as stated
in the contract occur, the ARCA still obligates
the Government to pay any and all amounts
owed by PIATCO to its lenders in connection
with NAIA IPT III. Worse, the conditions that
would make the Government liable for
PIATCO's debts is triggered by PIATCO's own
default of its loan obligations to its Senior
Lenders to which loan contracts the
Government was never a party to. The
Government was not even given an option as
to what course of action it should take in case
PIATCO defaulted in the payment of its senior
loans. The Government, upon PIATCO's
default, would be merely notified by the
Senior Lenders of the same and it is the
Senior Lenders who are authorized to appoint
a qualified nominee or transferee. Should the
Senior Lenders fail to make such an
appointment, the Government is then
automatically obligated to "directly deal and
negotiate" with the Senior Lenders regarding
NAIA IPT III. The only way the Government
would not be liable for PIATCO's debt is for a
qualified nominee or transferee to be
appointed in place of PIATCO to continue the
construction, operation and maintenance of
NAIA IPT III. This "pre-condition", however, will
not take the contract out of the ambit of a

direct guarantee by the government as the

existence, availability and willingness of a
qualified nominee or transferee is totally out
of the government's control. As such the
Government is virtually at the mercy of
PIATCO (that it would not default on its loan
obligations to its Senior Lenders), the Senior
Lenders (that they would appoint a qualified
nominee or transferee or agree to some other
arrangement with the Government) and the
existence of a qualified nominee or transferee
who is able and willing to take the place of
PIATCO in NAIA IPT III.
The proscription against government
guarantee in any form is one of the
policy considerations behind the BOT
Law. Clearly, in the present case, the ARCA
obligates the Government to pay for all loans,
advances and obligations arising out of
financial facilities extended to PIATCO for the
implementation of the NAIA IPT III project
should PIATCO default in its loan obligations
to its Senior Lenders and the latter fails to
appoint a qualified nominee or transferee.
This in effect would make the Government
liable for PIATCO's loans should the conditions
as set forth in the ARCA arise. This is a form
of direct government guarantee.
The BOT Law and its implementing rules
provide that in order for an unsolicited
proposal for a BOT project may be accepted,
the following conditions must first be met: (1)
the project involves a new concept in
technology and/or is not part of the list of
priority projects, (2) no direct government
guarantee,
subsidy
or
equity
is
required, and (3) the government agency or
local government unit has invited by
publication other interested parties to a
public bidding and conducted the same.56 The
failure to meet any of the above conditions
will result in the denial of the proposal. It is

further provided that the presence of direct

government guarantee, subsidy or equity will
"necessarily disqualify a proposal from being
treated and accepted as an unsolicited
proposal."57 The BOT Law clearly and strictly
prohibits direct government guarantee,
subsidy and equity in unsolicited proposals
that the mere inclusion of a provision to that
effect is fatal and is sufficient to deny the
proposal. It stands to reason therefore that if
a proposal can be denied by reason of the
existence of direct government guarantee,
then its inclusion in the contract executed
after the said proposal has been accepted is
likewise sufficient to invalidate the contract
itself. A prohibited provision, the inclusion of
which would result in the denial of a proposal
cannot, and should not, be allowed to later on
be inserted in the contract resulting from the
said proposal. The basic rules of justice and
fair play alone militate against such an
occurrence and must not, therefore, be
countenanced particularly in this instance
where the government is exposed to the risk
of shouldering hundreds of million of dollars
in debt.
This Court has long and consistently adhered
to the legal maxim that those that cannot be
done directly cannot be done indirectly. 58 To
declare the PIATCO contracts valid
despite the clear statutory prohibition
against a direct government guarantee
would not only make a mockery of what
the BOT Law seeks to prevent -- which is
to expose the government to the risk of
incurring
a
monetary
obligation
resulting from a contract of loan
between the project proponent and its
lenders and to which the Government is
not a party to -- but would also render
the BOT Law useless for what it seeks to
achieve - to make use of the resources
of the private sector in the "financing,

operation
and
maintenance
of
infrastructure
and
development
projects"59 which
are
necessary
for
national growth and development but
which the government, unfortunately,
could ill-afford to finance at this point in
time.
IV
Temporary takeover of business affected
with public interest
Article XII, Section 17 of the 1987 Constitution
provides:
Section 17. In times of national
emergency, when the public interest
so requires, the State may, during the
emergency and under reasonable
terms prescribed by it, temporarily
take over or direct the operation of
any privately owned public utility or
business affected with public interest.
The above provision pertains to the right of
the State in times of national emergency, and
in the exercise of its police power, to
temporarily take over the operation of any
business affected with public interest. In the
1986 Constitutional Commission, the term
"national emergency" was defined to include
threat from external aggression, calamities or
national disasters, but not strikes "unless it is
of such proportion that would paralyze
government service."60 The duration of the
emergency itself is the determining factor as
to how long the temporary takeover by the
government would last.61 The temporary
takeover by the government extends only to
the operation of the business and not to the
ownership thereof. As such the government
is not required to compensate the

private
entity-owner
of
the
said
business as there is no transfer of
ownership, whether
permanent
or
temporary. The private entity-owner affected
by the temporary takeover cannot, likewise,
claim just compensation for the use of the
said business and its properties as the
temporary takeover by the government is in
exercise of its police power and not of its
power of eminent domain.
Article V, Section 5.10 (c) of the 1997
Concession Agreement provides:
Section 5.10 Temporary Take-over of
operations by GRP.
.
(c) In the event the development
Facility or any part thereof and/or the
operations of Concessionaire or any
part thereof, become the subject
matter of or be included in any notice,
notification, or declaration concerning
or relating to acquisition, seizure or
appropriation by GRP in times of war
or national emergency, GRP shall, by
written notice to Concessionaire,
immediately take over the operations
of the Terminal and/or the Terminal
Complex. During such take over by
GRP, the Concession Period shall be
suspended;
provided,
that
upon
termination of war, hostilities or
national emergency, the operations
shall be returned to Concessionaire, at
which time, the Concession period
shall
commence
to
run
again.Concessionaire
shall
be
entitled
to
reasonable
compensation for the duration of
the temporary take over by GRP,
which compensation shall take

into account the reasonable cost

for the use of the Terminal and/or
Terminal Complex, (which is in the
amount at least equal to the debt
service
requirements
of
Concessionaire, if the temporary
take over should occur at the time
when Concessionaire is still servicing
debts owed to project lenders), any
loss or damage to the Development
Facility, and other consequential
damages. If the parties cannot agree
on the reasonable compensation of
Concessionaire, or on the liability of
GRP as aforesaid, the matter shall be
resolved in accordance with Section
10.01
[Arbitration].
Any
amount
determined to be payable by GRP to
Concessionaire shall be offset from the
amount
next
payable
by
Concessionaire to GRP.62
PIATCO cannot, by mere contractual
stipulation,
contravene
the
Constitutional provision on temporary
government takeover and obligate the
government to pay "reasonable cost for
the use of the Terminal and/or Terminal
Complex."63 Article XII, section 17 of the
1987 Constitution envisions a situation
wherein the exigencies of the times
necessitate the government to "temporarily
take over or direct the operation of any
privately owned public utility or business
affected with public interest." It is the welfare
and interest of the public which is the
paramount consideration in determining
whether or not to temporarily take over a
particular business. Clearly, the State in
effecting the temporary takeover is exercising
its police power. Police power is the "most
essential,
insistent,
and
illimitable
of
powers."64 Its exercise therefore must not be
unreasonably hampered nor its exercise be a

source of obligation by the government in the

absence of damage due to arbitrariness of its
exercise.65 Thus, requiring the government to
pay reasonable compensation for the
reasonable use of the property pursuant to
the operation of the business contravenes the
Constitution.
V
Regulation of Monopolies
A monopoly is "a privilege or peculiar
advantage vested in one or more persons or
companies, consisting in the exclusive right
(or power) to carry on a particular business or
trade, manufacture a particular article, or
control
the
sale
of
a
particular
commodity."66 The
1987 Constitution
strictly regulates monopolies, whether
private or public, and even provides for their
prohibition if public interest so requires.
Article XII, Section 19 of the 1987 Constitution
states:
Sec. 19. The state shall regulate or
prohibit monopolies when the public
interest so requires. No combinations
in restraint of trade or unfair
competition shall be allowed.
Clearly, monopolies are not per se prohibited
by the Constitution but may be permitted to
exist to aid the government in carrying on an
enterprise or to aid in the performance of
various services and functions in the
interest of the public.67 Nonetheless, a
determination must first be made as to
whether public interest requires a monopoly.
As monopolies are subject to abuses that can
inflict severe prejudice to the public, they are
subject to a higher level of State regulation
than an ordinary business undertaking.

In the cases at bar, PIATCO, under the 1997

Concession Agreement and the ARCA, is
granted the "exclusive right to operate a
commercial international passenger terminal
within the Island of Luzon" at the NAIA IPT
III.68This is with the exception of already
existing international airports in Luzon such
as those located in the Subic Bay Freeport
Special Economic Zone ("SBFSEZ"), Clark
Special Economic Zone ("CSEZ") and in Laoag
City.69 As such, upon commencement of
PIATCO's operation of NAIA IPT III, Terminals 1
and 2 of NAIA would cease to function as
international passenger terminals. This,
however, does not prevent MIAA to use
Terminals 1 and 2 as domestic passenger
terminals or in any other manner as it may
deem appropriate except those activities that
would compete with NAIA IPT III in the latter's
operation as an international passenger
terminal.70 The right granted to PIATCO
to exclusively operate NAIA IPT III would
be for a period of twenty-five (25) years from
the In-Service Date71 and renewable for
another twenty-five (25) years at the option
of the government.72 Both the 1997
Concession Agreement and the ARCA
further provide that, in view of the
exclusive right granted to PIATCO, the
concession contracts of the service
providers currently servicing Terminals 1
and 2 would no longer be renewed and
those
concession
contracts
whose
expiration are subsequent to the InService Date would cease to be effective
on the said date.73
The operation of an international passenger
airport terminal is no doubt an undertaking
imbued with public interest. In entering into a
BuildOperate-and-Transfer contract for the
construction, operation and maintenance of
NAIA IPT III, the government has determined
that public interest would be served better if

private sector resources were used in its

construction and an exclusive right to operate
be granted to the private entity undertaking
the said project, in this case PIATCO.
Nonetheless, the privilege given to PIATCO is
subject
to
reasonable
regulation
and
supervision by the Government through the
MIAA, which is the government agency
authorized to operate the NAIA complex, as
well as DOTC, the department to which MIAA
is attached.74
This is in accord with the Constitutional
mandate that a monopoly which is not
prohibited must be regulated.75While it is the
declared policy of the BOT Law to encourage
private sector participation by "providing a
climate
of
minimum
government
regulations,"76 the same does not mean that
Government must completely surrender its
sovereign power to protect public interest in
the operation of a public utility as a
monopoly. The operation of said public utility
can not be done in an arbitrary manner to the
detriment of the public which it seeks to
serve. The right granted to the public utility
may be exclusive but the exercise of the right
cannot run riot. Thus, while PIATCO may be
authorized to exclusively operate NAIA IPT III
as an international passenger terminal, the
Government, through the MIAA, has the right
and the duty to ensure that it is done in
accord with public interest. PIATCO's right to
operate NAIA IPT III cannot also violate the
rights of third parties.
Section 3.01(e) of the 1997 Concession
Agreement and the ARCA provide:
3.01 Concession Period
xxx

xxx

xxx

(e) GRP confirms that certain

concession agreements relative to
certain
services
and
operations
currently being undertaken at the
Ninoy Aquino International Airport
passenger Terminal I have a validity
period extending beyond the InService
Date.
GRP
through
DOTC/MIAA, confirms that
these
services and operations shall not be
carried over to the Terminal and the
Concessionaire is under no legal
obligation to permit such carryover except through a separate
agreement duly entered into with
Concessionaire.
In
the
event
Concessionaire becomes involved in
any litigation initiated by any such
concessionaire
or
operator,
GRP
undertakes
and
hereby
holds
Concessionaire free and harmless on
full indemnity basis from and against
any loss and/or any liability resulting
from any such litigation, including the
cost of litigation and the reasonable
fees
paid
or
payable
to
Concessionaire's counsel of choice, all
such amounts shall be fully deductible
by way of an offset from any amount
which the Concessionaire is bound to
pay GRP under this Agreement.
During
the
oral
arguments
on
December 10, 2002, the counsel for
the petitioners-in-intervention for G.R.
No. 155001 stated that there are two
service providers whose contracts are
still existing and whose validity
extends beyond the In-Service Date.
One contract remains valid until 2008
and the other until 2010.77
We hold that while the service providers
presently operating at NAIA Terminal 1 do not

have an absolute right for the renewal or the

extension of their respective contracts, those
contracts whose duration extends beyond
NAIA IPT III's In-Service-Date should not be
unduly prejudiced. These contracts must be
respected not just by the parties thereto but
also by third parties. PIATCO cannot, by law
and certainly not by contract, render a valid
and binding contract nugatory. PIATCO, by the
mere expedient of claiming an exclusive right
to operate, cannot require the Government to
break its contractual obligations to the
service providers. In contrast to the arrastre
and stevedoring service providers in the case
of Anglo-Fil
Trading
Corporation
v.
Lazaro78 whose
contracts
consist
of
temporary hold-over permits, the affected
service providers in the cases at bar, have a
valid and binding contract with the
Government, through MIAA, whose period of
effectivity, as well as the other terms and
conditions thereof, cannot be violated.
In fine, the efficient functioning of NAIA IPT III
is imbued with public interest. The provisions
of the 1997 Concession Agreement and the
ARCA did not strip government, thru the
MIAA, of its right to supervise the operation of
the whole NAIA complex, including NAIA IPT
III. As the primary government agency tasked
with the job,79 it is MIAA's responsibility to
ensure that whoever by contract is given the
right to operate NAIA IPT III will do so within
the bounds of the law and with due regard to
the rights of third parties and above all, the
interest of the public.
VI
CONCLUSION
In sum, this Court rules that in view of the
absence of the requisite financial capacity of
the Paircargo Consortium, predecessor of

respondent PIATCO, the award by the PBAC of

the contract for the construction, operation
and maintenance of the NAIA IPT III is null and
void. Further, considering that the 1997
Concession Agreement contains material and
substantial amendments, which amendments
had the effect of converting the 1997
Concession Agreement into an entirely
different agreement from the contract bidded
upon, the 1997 Concession Agreement is
similarly null and void for being contrary to
public policy. The provisions under Sections
4.04(b) and (c) in relation to Section 1.06 of
the 1997 Concession Agreement and Section
4.04(c) in relation to Section 1.06 of the
ARCA, which constitute a direct government
guarantee expressly prohibited by, among
others, the BOT Law and its Implementing
Rules and Regulations are also null and void.
The Supplements, being accessory contracts
to the ARCA, are likewise null and void.
WHEREFORE, the
1997
Concession
Agreement, the Amended and Restated
Concession Agreement and the Supplements
thereto are set aside for being null and void.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Ynares-Santiago,
Sandoval-Gutierrez, Austria-Martinez, Corona,
and
Carpio-Morales,
JJ., concur.
Vitug, J., see separate (dissenting) opinion.
Panganiban, J., please see separate opinion.
Quisumbing, J., no jurisdiction, please see
separate opinion of J. Vitug in which he
concurs.
Carpio,
J., no
part.
Callejo, Sr., J., also concur in the separate
opinion
of
J.
Panganiban.
Azcuna, J., joins the separate opinion of J.
Vitug.

SEPARATE OPINIONS
VITUG, J.:
This Court is bereft of jurisdiction to hear the
petitions at bar. The Constitution provides
that the Supreme Court shall exercise original
jurisdiction over,
among other actual
controversies,
petitions
for certiorari,
prohibition, mandamus, quo warranto, and
habeas corpus.1 The cases in question,
although denominated to be petitions for
prohibition, actually pray for the nullification
of the PIATCO contracts and to restrain
respondents
from
implementing
said
agreements
for
being
illegal
and
unconstitutional.
Section 2, Rule 65 of the Rules of Court
states:
"When the proceedings of any
tribunal, corporation, board, officer or
person, whether exercising judicial,
quasi-judicial or ministerial functions,
are without or in excess of its or his
jurisdiction, or with grave abuse of
discretion amounting to lack or excess
of jurisdiction, and there is no appeal
or any other plain, speedy and
adequate remedy in the ordinary
course of law, a person aggrieved
thereby may file a verified petition in
the proper court, alleging the facts
with certainty and praying that
judgment be rendered commanding
the respondent to desist from further
proceedings in the action or matter
specified
therein,
or
otherwise
granting such incidental reliefs as law
and justice may require."

The rule is explicit. A petition for prohibition

may be filed against a tribunal, corporation,
board, officer or person, exercising judicial,
quasi-judicial or ministerial functions. What
the petitions seek from respondents do not
involve judicial, quasi-judicial or ministerial
functions. In prohibition, only legal issues
affecting the jurisdiction of the tribunal, board
or officer involved may be resolved on the
basis of undisputed facts.2 The parties allege,
respectively, contentious evidentiary facts. It
would be difficult, if not anomalous, to decide
the jurisdictional issue on the basis of the
contradictory factual submissions made by
the parties.3 As the Court has so often
exhorted, it is not a trier of facts.

separation of powers if, at every turn, the

Court allows itself to pass upon at will the
disposition of a co-equal, independent and
coordinate branch in our system of
government. I dread to think of the so varied
uncertainties that such an undue interference
can lead to.

The petitions, in effect, are in the nature of

actions for declaratory relief under Rule 63 of
the Rules of Court. The Rules provide that any
person interested under a contract may,
before breach or violation thereof, bring an
action in the appropriate Regional Trial Court
to determine any question of construction or
validity arising, and for a declaration of his
rights or duties thereunder.4 The Supreme
Court assumes no jurisdiction over petitions
for declaratory relief which are cognizable by
regional trial courts.5

PANGANIBAN, J.:

As I have so expressed in Tolentino vs.

Secretary of Finance,6 reiterated in Santiago
vs. Guingona, Jr.7 , the Supreme Court should
not be thought of as having been tasked with
the awesome responsibility of overseeing the
entire bureaucracy. Pervasive and limitless,
such as it may seem to be under the 1987
Constitution, judicial power still succumbs to
the paramount doctrine of separation of
powers. The Court may not at good liberty
intrude, in the guise of sovereign imprimatur,
into every affair of government. What
significance can still then remain of the timehonored and widely acclaimed principle of

Accordingly, I vote for the dismissal of the

petition.
Quisumbing, and Azcuna, JJ., concur.

The five contracts for the construction and

the operation of Ninoy Aquino International
Airport (NAIA) Terminal III, the subject of the
consolidated Petitions before the Court, are
replete with outright violations of law, public
policy and the Constitution. The only proper
thing to do is declare them all null and void
ab initio and let the chips fall where they
may. Fiat iustitia ruat coelum.
The facts leading to this controversy are
already well presented in the ponencia. I shall
not burden the readers with a retelling
thereof. Instead, I will cut to the chase and
directly address the two sets of gut issues:
1. The first issue is procedural: Does the
Supreme Court have original jurisdiction to
hear and decide the Petitions? Corollarily, do
petitioners have locus standi and should this
Court decide the cases without any
mandatory referral to arbitration?
2. The second one is substantive in character:
Did the subject contracts violate the

Constitution, the laws, and public policy to

such an extent as to render all of them void
and inexistent?
My answer to all the above questions is a firm
"Yes."
The
Procedural
Issue:
Jurisdiction, Standing and Arbitration
Definitely and surely, the issues involved in
these Petitions are clearly of transcendental
importance and of national interest. The
subject contracts pertain to the construction
and the operation of the country's premiere
international
airport
terminal
an
ultramodern world-class public utility that will
play a major role in the country's economic
development and serve to project a positive
image of our country abroad. The five buildoperate-&-transfer (BOT) contracts, while
entailing the investment of billions of pesos in
capital and the availment of several hundred
millions of dollars in loans, contain provisions
that tend to establish a monopoly, require the
disbursements
of
public
funds
sans
appropriations, and provide government
guarantees
in
violation
of
statutory
prohibitions, as well as other provisions
equally offensive to law, public policy and the
Constitution. Public interest will inevitably be
affected thereby.
Thus, objections to these Petitions, grounded
upon (a) the hierarchy of courts, (b) the need
for arbitration prior to court action, and (c)
the alleged lack of sufficient personality,
standing or interest, being in the main
procedural matters, must now be set aside,
as they have been in past cases. This Court
must
be
permitted
to
perform
its
constitutional duty of determining whether
the other agencies of government have acted
within the limits of the Constitution and the

laws, or if they have gravely abused the

discretion entrusted to them.1
Hierarchy of Courts
The Court has, in the past, held that
questions relating to gargantuan government
contracts ought to be settled without
delay.2 This holding applies with greater force
to the instant cases. Respondent Piatco is
partly correct in averring that petitioners can
obtain relief from the regional trial courts via
an action to annul the contracts.
Nevertheless, the unavoidable consequence
of having to await the rendition and the
finality of any such judgment would be a
prolonged state of uncertainty that would be
prejudicial to the nation, the parties and the
general public. And, in light of the feared loss
of jobs of the petitioning workers, consequent
to the inevitable pretermination of contracts
of the petitioning service providers that will
follow upon the heels of the impending
opening of NAIA Terminal III, the need for
relief is patently urgent, and therefore, direct
resort to this Court through the special civil
action of prohibition is thus justified.3
Contrary to Piatco's argument that the
resolution of the issues raised in the Petitions
will require delving into factual questions, 4 I
submit that their disposition ultimately turns
on questions of law.5 Further, many of the
significant and relevant factual questions can
be easily addressed by an examination of the
documents submitted by the parties. In any
event, the Petitions raise some novel
questions involving the application of the
amended BOT Law, which this Court has seen
fit to tackle.
Arbitration

Should the dispute be referred to arbitration

prior to judicial recourse? Respondent Piatco
claims that Section 10.02 of the Amended
and Restated Concession Agreement (ARCA)
provides for arbitration under the auspices of
the International Chamber of Commerce to
settle any dispute or controversy or claim
arising in connection with the Concession
Agreement,
its
amendments
and
supplements. The government disagrees,
however, insisting that there can be no
arbitration based on Section 10.02 of the
ARCA, since all the Piatco contracts are void
ab initio. Therefore, all contractual provisions,
including Section 10.02 of the ARCA, are
likewise void, inexistent and inoperative. To
support
its
stand,
the
government
cites Chavez v. Presidential Commission on
Good Government:6 "The void agreement will
not be rendered operative by the parties'
alleged performance (partial or full) of their
respective prestations. A contract that
violates the Constitution and the law is null
and void ab initio and vests no rights and
creates no obligations. It produces no legal
effect at all."
As will be discussed at length later, the Piatco
contracts are indeed void in their entirety;
thus, a resort to the aforesaid provision on
arbitration is unavailing. Besides, petitioners
and petitioners-in-intervention have pointed
out that, even granting arguendo that the
arbitration clause remained a valid provision,
it still cannot bind them inasmuch as they are
not parties to the Piatco contracts. And in the
final analysis, it is unarguable that the
arbitration process provided for under Section
10.02 of the ARCA, to be undertaken by a
panel of three (3) arbitrators appointed in
accordance with the Rules of Arbitration of
the International Chamber of Commerce, will
not be able to address, determine and
definitively resolve the constitutional and

legal questions that have been raised in the

Petitions before us.
Locus Standi
Given this Court's previous decisions in cases
of similar import, no one will seriously doubt
that, being taxpayers and members of the
House
of
Representatives,
Petitioners
Baterina et al. have locus standi to bring the
Petition in GR No. 155547. In Albano v.
Reyes,7 this Court held that the petitioner
therein, suing as a citizen, taxpayer and
member of the House of Representatives, was
sufficiently clothed with standing to bring the
suit questioning the validity of the assailed
contract. The Court cited the fact that public
interest was involved, in view of the
important role of the Manila International
Container Terminal (MICT) in the country's
economic development and the magnitude of
the
financial
consideration.
This,
notwithstanding the fact that expenditure of
public funds was not required under the
assailed contract.
In the cases presently under consideration,
petitioners' personal and substantial interest
in the controversy is shown by the fact that
certain provisions in the Piatco contracts
create obligations on the part of government
(through the DOTC and the MIAA) to disburse
public funds without prior congressional
appropriations.
Petitioners thus correctly assert that the
injury to them has a twofold aspect: (1) they
are adversely affected as taxpayers on
account of the illegal disbursement of public
funds;
and
(2)
they
are
prejudiced qua legislators,
since
the
contractual
provisions
requiring
the
government to incur expenditures without
appropriations also operate as limitations

upon the exclusive power and prerogative of

Congress over the public purse. As members
of the House of Representatives, they are
actually deprived of discretion insofar as the
inclusion of those items of expenditure in the
budget is concerned. To prevent such
encroachment upon the legislative privilege
and obviate injury to the institution of which
they are members, petitioners-legislators
have locus standi to bring suit.
Messrs. Agan et al. and Lopez et al., are
likewise taxpayers and thus possessed of
standing
to
challenge
the
illegal
disbursement of public funds. Messrs. Agan et
al., in particular, are employees (or
representatives of employees) of various
service providers that have (1) existing
concession agreements with the MIAA to
provide airport services necessary to the
operation of the NAIA and (2) service
agreements to furnish essential support
services to the international airlines operating
at the NAIA.
On the other hand, Messrs. Lopez et al. are
employees of the MIAA. These petitioners
(Messrs. Agan et al. and Messrs. Lopez et al.)
are confronted with the prospect of being laid
off from their jobs and losing their means of
livelihood when their employer-companies are
forced to shut down or otherwise retrench
and
cut
back
on
manpower.
Such
development would result from the imminent
implementation of certain provisions in the
contracts that tend toward the creation of a
monopoly in favor of Piatco, its subsidiaries
and related companies.
Petitioners-in-intervention
are
service
providers in the business of furnishing airportrelated services to international airlines and
passengers in the NAIA and are therefore
competitors of Piatco as far as that line of

business is concerned. On account of

provisions in the Piatco contracts, petitionersin-intervention have to enter into a written
contract with Piatco so as not to be shut out
of NAIA Terminal III and barred from doing
business there. Since there is no provision to
ensure or safeguard free and fair competition,
they are literally at its mercy. They claim
injury on account of their deprivation of
property (business) and of the liberty to
contract, without due process of law.

The build-operate-and-transfer (BOT) project

for the NAIA Passenger Terminal III comes
under the category of an "unsolicited
proposal," which is the subject of Section 4-A
of the BOT Law.10 The unsolicited proposal
was originally submitted by the Asia's
Emerging Dragon Corporation (AEDC) to the
Department
of
Transportation
and
Communications (DOTC) and the Manila
International Airport Authority (MIAA), which
reviewed and approved the proposal.

And even if petitioners and petitioners-inintervention were not sufficiently clothed with
legal standing, I have at the outset already
established that, given its impact on the
public and on national interest, this
controversy is laden with transcendental
importance and constitutional significance.
Hence, I do not hesitate to adopt the same
position as was enunciated in Kilosbayan v.
Guingona Jr.8 that "in cases of transcendental
importance, the Court may relax the standing
requirements and allow a suit to prosper
even when there is no direct injury to the
party claiming the right of judicial review."9

The draft of the concession agreement as

negotiated between AEDC and DOTC/MIAA
was endorsed to the National Economic
Development Authority (NEDA-ICC), which in
turn reviewed it on the basis of its scope,
economic viability, financial indicators and
risks; and thereafter approved it for bidding.

The
Substantive
Issue:
Violations of the Constitution and the
Laws
From the Outset, the Bidding Process
Was Flawed and Tainted
After studying the documents submitted and
arguments advanced by the parties, I have no
doubt that, right at the outset, Piatco was not
qualified to participate in the bidding process
for the Terminal III project, but was
nevertheless permitted to do so. It even won
the bidding and was helped along by what
appears to be a series of collusive and
corrosive acts.

The DOTC/MIAA then prepared the Bid

Documents,
incorporating
therein
the
negotiated Draft Concession Agreement, and
published invitations for public bidding, i.e.,
for the submission of comparative or
competitive proposals. Piatco's predecessorin-interest, the Paircargo Consortium, was the
only company that submitted a competitive
bid or price challenge.
At this point, I must emphasize that the law
requires the award of a BOT project to the
bidder that has satisfied the minimum
requirements; and met the technical,
financial, organizational and legal standards
provided in the BOT Law. Section 5 of this
statute states:
"Sec. 5. Public bidding of projects.
-...
"In the case of a build-operate-andtransfer arrangement, the contract

shall be awarded to the bidder

who,having satisfied the minimum
financial, technical, organizational
and legal standards required by
this Act, has submitted the lowest bid
and most favorable terms for the
project, based on the present value of
its proposed tolls, fees, rentals and
charges over a fixed term for the
facility
to
be
constructed,
rehabilitated,
operated
and
maintained
according
to
the
prescribed minimum design and
performance standards, plans and
specifications. . . ." (Emphasis
supplied.)
The same provision requires that the price
challenge via public bidding "must be
conducted under a two-envelope/two-stage
system: the first envelope to contain the
technical proposal and the second envelope
to contain the financial proposal." Moreover,
the 1994 Implementing Rules and Regulations
(IRR) provide that only those bidders that
have passed the prequalification stage are
permitted to have their two envelopes
reviewed.
In other words, prospective bidders must
prequalify by submitting their prequalification
documents for evaluation; and only the prequalified bidders would be entitled to have
their bids opened, evaluated and appreciated.
On the other hand, disqualified bidders are to
be informed of the reason for their
disqualification.
This
procedure
was
confirmed and reiterated in the Bid
Documents, which I quote thus: "Prequalified
proponents will be considered eligible to
move to second stage technical proposal
evaluation. The second and third envelopes
of pre-disqualified proponents will be
returned."11

Aside from complying with the legal and

technical requirements (track record or
experience of the firm and its key personnel),
a project proponent desiring to prequalify
must also demonstrate its financial capacity
to undertake the project. To establish such
capability, a proponent must prove that it is
able to raise the minimum amount of equity
required for the project and to procure the
loans or financing needed for it. Section 5.4(c)
of the 1994 IRR provides:
"Sec.
5.4.
Prequalification
Requirements. - To pre-qualify, a
project proponent must comply with
the following requirements:
xxx

xxx

xxx

"c. Financial Capability. The project

proponent
must
have
adequate
capability to sustain the financing
requirements
for
the
detailed
engineering
design,
construction,
and/or operation and maintenance
phases of the project, as the case may
be. For purposes of prequalification,
this capability shall be measured in
terms of: (i) proof of the ability of the
project
proponent
and/or
the
consortium to provide a minimum
amount of equity to the project, and
(ii) a letter testimonial from reputable
banks attesting that the project
proponent and/or members of the
consortium are banking with them,
that they are in good financial
standing, and that they have adequate
resources.
The
government
Agency/LGU
concerned
shall
determine on a project-to-project
basis, and before prequalification, the
minimum
amount
of
equity
needed. . . . ." (Italics supplied)

Since the minimum amount of equity for the

project was set at 30 percent 12 of the
minimum project cost of US$350 million, the
minimum amount of equity required of any
proponent
stood
at
US$105
million.
Converted to pesos at the exchange rate then
of P26.239 to US$1.00 (as quoted by the
Bangko Sentral ng Pilipinas), the peso
equivalent of the minimum equity was
P2,755,095,000.
However, the combined equity or net worth of
the Paircargo consortium stood at only
P558,384,871.55.13 This amount was only
slightly over 6 percent of the minimum
project cost and very much short of the
required minimum
equity,
which was
equivalent to 30 percent of the project cost.
Such deficiency should have immediately
caused the disqualification of the Paircargo
consortium. This matter was brought to the
attention of the Prequalification and Bidding
Committee (PBAC).
Notwithstanding the glaring deficiency, DOTC
Undersecretary Primitivo C. Cal, concurrent
chair of the PBAC, declared in a Memorandum
dated 14 October 1996 that "the Challenger
(Paircargo consortium) was found to have a
combined net worth of P3,926,421,242.00
that could support a project costing
approximately P13 billion." To justify his
conclusion, he asserted: "It is not a
requirement that the networth must be
`unrestricted'.
To
impose
this
as
a
requirement now will be nothing less than
unfair."
He further opined, "(T)he networth reflected
in the Financial Statement should not be
taken as the amount of money to be used to
answer the required thirty (30%) percent
equity of the challenger but rather to be used
in establishing if there is enough basis to

believe that the challenger can comply with

the required 30% equity. In fact, proof of
sufficient equity is required as one of the
conditions for award of contract (Sec. 12.1 of
IRR of the BOT Law) but not for
prequalification
(Sec.
5.4
of
same
document)."
On the basis of the foregoing dubious
declaration, the Paircargo consortium was
deemed prequalified and thus permitted to
proceed to the other stages of the bidding
process.
By virtue of the prequalified status conferred
upon the Paircargo, Undersecretary Cal's
findings in effect relieved the consortium of
the need to comply with the financial
capability requirement imposed by the BOT
Law and IRR. This position is unmistakably
and squarely at odds with the Supreme
Court's consistent doctrine emphasizing the
strict
application
of
pertinent
rules,
regulations and guidelines for the public
bidding process, in order to place each bidder
- actual or potential - on the same footing.
Thus, it is unarguably irregular and contrary
to the very concept of public bidding to
permit a variance between the conditions
under which bids are invited and those under
which proposals are submitted and approved.
Republic v. Capulong,14 teaches that if one
bidder is relieved from having to conform to
the conditions that impose some duty upon it,
that bidder is not contracting in fair
competition with those bidders that propose
to be bound by all conditions. The essence of
public bidding is, after all, an opportunity for
fair competition and a basis for the precise
comparison of bids.15 Thus, each bidder must
bid under the same conditions; and be
subject to the same guidelines, requirements
and limitations. The desired result is to be

able to determine the best offer or lowest

bid, all things being equal.

form part of the bidding/tender and related

documents.

Inasmuch as the Paircargo consortium did not

possess the minimum equity equivalent to 30
percent of the minimum project cost, it should
not have been prequalified or allowed to
participate further in the bidding. The
Prequalification and Bidding Committee
(PBAC) should therefore not have opened the
two envelopes of the consortium containing
its technical and financial proposals; required
AEDC to match the consortium's bid; 16 or
awarded the Concession Agreement to the
consortium's successor-in-interest, Piatco.

This pronouncement, I believe, was a

grievous misapplication of the mentioned
provision. The "proprietary information"
referred to in Section 11.6 of the IRR pertains
only to the proprietary information of
the originator of an unsolicited proposal, and
not to those belonging to a challenger. The
reason
for
the
protection
accorded
proprietary information at all is the fact that,
according to Section 4-A of the BOT Law as
amended, a proposal qualifies as an
"unsolicited proposal" when it pertains to a
project that involves "a new concept or
technology", and/or a project that is not on
the government's list of priority projects.

As there was effectively no public bidding to

speak of, the entire bidding process having
been flawed and tainted from the very outset,
therefore, the award of the concession to
Paircargo's successor Piatco was void, and the
Concession Agreement executed with the
latter was likewise void ab initio. For this
reason, Piatco cannot and should not be
allowed to benefit from that Agreement.17
AEDC Was Deprived of the Right to
Match PIATCO's Price Challenge
In DOTC PBAC Bid Bulletin No. 4 (par. 3),
Undersecretary Cal declared that, for
purposes of matching the price challenge of
Piatco, AEDC as originator of the unsolicited
proposal would be permitted access only to
the schedule of proposed Annual Guaranteed
Payments submitted by Piatco, and not to the
latter's financial and technical proposals that
constituted the basis for the price challenge
in the first place. This was supposedly in
keeping with Section 11.6 of the 1994 IRR,
which provides that proprietary information is
to be respected, protected and treated with
utmost confidentiality, and is therefore not to

To be considered as utilizing a new concept or

technology, a project must involve the
possession of exclusive rights (worldwide or
regional) over a process; or possession of
intellectual property rights over a design,
methodology
or
engineering
concept.18 Patently, the intent of the BOT Law
is to encourage individuals and groups to
come up with creative innovations, fresh
ideas and new technology. Hence, the
significance and necessity of protecting
proprietary information in connection with
unsolicited proposals. And to make the
encouragement real, the law also extends to
such individuals and groups what amounts to
a "right of first refusal" to undertake the
project they conceptualized, involving the use
of new technology or concepts, through the
mechanism of matching a price challenge.
A competing bid is never just any figure
conjured from out of the blue; it is arrived at
after studying economic, financial, technical
and other, factors; it is likewise based on
certain assumptions as to the nature of the

business, the market potentials, the probable

demand for the product or service, the future
behavior of cost items, political and other
risks, and so on. It is thus self-evident that in
order to be able to intelligently match a bid or
price challenge, a bidder must be given
access to the assumptions and the
calculations that went into crafting the
competing bid.
In this instance, the financial and technical
proposals of Piatco would have provided
AEDC with the necessary information to
enable it to make a reasonably informed
matching bid. To put it more simply, a bidder
unable
to
access
the
competitor's
assumptions will never figure out how the
competing bid came about; requiring him to
"counter-propose" is like having him shoot at
a target in the dark while blindfolded.
By withholding from AEDC the challenger's
financial and technical proposals containing
the
critical
information
it
needed,
Undersecretary Cal actually and effectively
deprived AEDC of the ability to match the
price challenge. One could say that AEDC did
not have the benefit of a "level playing field."
It seems to me, though, that AEDC
was actually shut out of the game altogether.
At the end of the day, the bottom line is that
the validity and the propriety of the award to
Piatco had been irreparably impaired.
Delayed Issuance of the Notice of Award
Violated the BOT Law and the IRR
Section 9.5 of the IRR requires that the Notice
of Award must indicate the time frame within
which the winner of the bidding (and
therefore the prospective awardee) shall
submit the prescribed performance security,

proof of commitment of equity contributions,

and indications of sources of financing
(loans); and, in the case of joint ventures, an
agreement showing that the members are
jointly and severally responsible for the
obligations of the project proponent under the
contract.
The purpose of having a definite and firm
timetable for the submission of the
aforementioned requirements is not only to
prevent delays in the project implementation,
but also to expose and weed out unqualified
proponents,
who
might
have
unceremoniously slipped through the earlier
prequalification process, by compelling them
to put their money where their mouths are, so
to speak.
Nevertheless, this provision can be easily
circumvented by merely postponing the
actual issuance of the Notice of Award, in
order to give the favored proponent sufficient
time to comply with the requirements. Hence,
to avert or minimize the manipulation of the
post-bidding process, the IRR not only set out
the precise sequence of events occurring
between the completion of the evaluation of
the technical bids and the issuance of the
Notice of Award, but also specified the
timetables for each such event. Definite
allowable extensions of time were provided
for, as were the consequences of a failure to
meet a particular deadline.
In particular, Section 9.1 of the 1994 IRR
prescribed that within 30 calendar days from
the time the second-stage evaluation shall
have been completed, the Committee must
come to a decision whether or not to award
the contract and, within 7 days therefrom, the
Notice of Award must be approved by the
head of agency or local government unit

(LGU) concerned, and its issuance must follow

within another 7 days thereafter.
Section 9.2 of the IRR set the procedure
applicable to projects involving substantial
government undertakings as follows: Within 7
days after the decision to award is made, the
draft contract shall be submitted to the ICC
for clearance on a no-objection basis. If the
draft
contract
includes
government
undertakings already previously approved,
then the submission shall be for information
only.
However, should there be additional or new
provisions
different
from
the
original
government undertakings, the draft shall
have to be reviewed and approved. The ICC
has 15 working days to act thereon, and
unless otherwise specified, its failure to act on
the contract within the specified time frame
signifies that the agency or LGU may proceed
with the award. The head of agency or LGU
shall approve the Notice of Award within
seven days of the clearance by the ICC on a
no-objection basis, and the Notice itself has
to be issued within seven days thereafter.
The highly regulated time-frames within
which the agents of government were to act
evinced the intent to impose upon them the
duty to act expeditiously throughout the
process, to the end that the project be
prosecuted and implemented without delay.
This regulated scenario was likewise intended
to discourage collusion and substantially
reduce the opportunity for agents of
government to abuse their discretion in the
course of the award process.
Despite the clear timetables set out in the
IRR, several lengthy and still-unexplained
delays occurred in the award process, as can
be observed from the presentation made by

the counsel for public respondents,19 quoted

hereinbelow:
"11 Dec. 1996 - The Paircargo Joint
Venture was informed by the PBAC
that AEDC failed to match and that
negotiations preparatory to Notice of
Award should be commenced. This
was the decision to award that
should have commenced the running
of the 7-day period to approve the
Notice of Award, as per Section 9.1 of
the IRR, or to submit the draft contract
to the ICC for approval conformably
with Section 9.2.
"01 April 1997 - The PBAC resolved
that a copy of the final draft of the
Concession Agreement be submitted
to the NEDA for clearance on a noobjection basis. This resolution came
more than 3 months too late as it
should have been made on the 20th of
December 1996 at the latest.
"16 April 1997 - The PBAC resolved
that the period of signing the
Concession Agreement be extended
by 15 days.
"18 April 1997 - NEDA approved the
Concession Agreement. Again this is
more than 3 months too late as the
NEDA's decision should have been
released on the 16th of January 1997
or fifteen days after it should have
been submitted to it for review.
"09 July 1997 - The Notice of Award
was issued to PIATCO. Following the
provisions of the IRR, the Notice of
Award should have been issued
fourteen days after NEDA's approval,

or the 28th of January 1997. In any

case, even if it were to be assumed
that the release of NEDA's approval on
the 18th of April was timely, the Notice
of Award should have been issued on
the 9th of May 1997. In both cases,
therefore, the release of the Notice of
Award occurred in a decidedly less
than timely fashion."
This chronology of events bespeaks an
unmistakable disregard, if not disdain, by the
persons in charge of the award process for
the time limitations prescribed by the IRR.
Their attitude flies in the face of this Court's
solemn
pronouncement
in Republic
v.
Capulong,20 that "strict observance of the
rules, regulations and guidelines of the
bidding process is the only safeguard to a
fair, honest and competitive public bidding."
From the foregoing, the only conclusion that
can possibly be drawn is that the BOT law and
its IRR were repeatedly violated with
unmitigated impunity - and by agents of
government, no less! On account of such
violation, the award of the contract to Piatco,
which undoubtedly gained time and benefited
from the delays, must be deemed null and
void from the beginning.
Further Amendments Resulted in a
Substantially
Different
Contract,
Awarded Without Public Bidding
But the violations and desecrations did not
stop there. After the PBAC made its decision
on December 11, 1996 to award the contract
to Piatco, the latter negotiated changes to the
Contract bidded out and ended up with what
amounts
to
a
substantially
new
contract without any public bidding. This
Contract was subsequently further amended
four more times through negotiation and

without any bidding. Thus, the contract

actually executed between Piatco and
DOTC/MIAA on July 12, 1997 (the Concession
Agreement or "CA") differed from the contract
bidded out (the draft concession agreement
or "DCA") in the following very significant
respects:
1. The CA inserted stipulations
creating a monopoly in favor of Piatco
in the business of providing airportrelated services for international
airlines and passengers.21
2. The CA provided that government is
to answer for Piatco's unpaid loans
and
debts
(lumped
under
the
term Attendant Liabilities) in the event
Piatco fails to pay its senior lenders.22
3. The CA provided that in case of
termination of the contract due to the
fault of government, government shall
pay all expenses that Piatco incurred
for the project plus the appraised
value of the Terminal.23
4. The CA imposed new and special
obligations on government, including
delivery of clean possession of the site
for the terminal; acquisition of
additional land at the government's
expense for construction of road
networks
required
by
Piatco's
approved plans and specifications; and
assistance to Piatco in securing site
utilities, as well as all necessary
permits, licenses and authorizations.24
5. Where Section 3.02 of the
requires government to refrain
competing with the contractor
respect to the operation of

DCA
from
with
NAIA

Terminal III, Section 3.02(b) of the CA

excludes
and
prohibits everyone,
including government, from directly or
indirectly competing with Piatco, with
respect to the operation of, as well
as operations
in,
NAIA
Terminal
III. Operations in is sufficiently broad
to encompass all retail and other
commercial
business
enterprises
operating within Terminal III, inclusive
of the businesses of providing various
airport-related
services
to
international airlines, within the scope
of the prohibition.
6. Under Section 6.01 of the DCA, the
following fees are subject to the
written approval of MIAA: lease/rental
charges, concession privilege fees for
passenger services, food services,
transportation
utility
concessions,
groundhandling,
catering
and
miscellaneous
concession
fees,
porterage fees, greeter/well-wisher
fees, carpark fees, advertising fees,
VIP
facilities
fees
and
others.
Moreover,
adjustments
to
the
groundhandling fees, rentals and
porterage fees are permitted only
once every two years and in
accordance with a parametric formula,
per DCA Section 6.03. However, the
CA as executed with Piatco provides in
Section 6.06 that all the aforesaid
fees, rentals and charges may be
adjusted without MIAA's approval or
intervention.
Neither
are
the
adjustments to these fees and charges
subject to or limited by any parametric
formula.25
7. Section 1.29 of the DCA provides
that the terminal fees, aircraft tacking
fees, aircraft parking fees, check-in

counter fees and other fees are to be

quoted and paid in Philippine pesos.
But per Section 1.33 of the CA, all the
aforesaid fees save the terminal fee
are denominated in US Dollars.
8. Under Section 8.07 of the DCA, the
term attendant
liabilities refers
to liabilities pertinent to NAIA Terminal
III, such as payment of lease rentals
and performance of other obligations
under the Land Lease Agreement; the
obligations
under
the
Tenant
Agreements; and payment of all taxes,
fees, charges and assessments of
whatever kind that may be imposed
on NAIA Terminal III or parts thereof.
But in Section 1.06 of the CA,
Attendant Liabilities refers to unpaid
debts of Piatco: "All amounts recorded
and from time to time outstanding in
the books of (Piatco) as owing to
Unpaid Creditors who have provided,
loaned or advanced funds actually
used for the Project, including all
interests, penalties, associated fees,
charges,
surcharges,
indemnities,
reimbursements and other related
expenses,
and
further
including
amounts owed by [Piatco] to its
suppliers,
contractors
and
subcontractors."
9. Per Sections 8.04 and 8.06 of the
DCA, government may, on account of
the contractors breach, rescind the
contract and select one of four
options: (a) take over the terminal and
assume all its attendant liabilities; (b)
allow the contractor's creditors to
assign the Project to another entity
acceptable to DOTC/MIAA; (c) pay the
contractor rent for the facilities and
equipment the DOTC may utilize; or

(d) purchase the terminal at a price

established
by
independent
appraisers. Depending on the option
selected,
government
may
take
immediate possession and control of
the terminal and its operations.
Government will be obligated to
compensate the contractor for the
"equivalent or proportionate contract
costs actually disbursed," but only
where government is the one in
breach of the contract. But under
Section 8.06(a) of the CA, whether on
account of Piatco's breach of contract
or its inability to pay its creditors,
government is obliged to either (a)
take over Terminal III and assume all of
Piatco's debts or (b) permit the
qualified unpaid creditors to be
substituted in place of Piatco or to
designate a new operator. And in the
event of government's breach of
contract, Piatco may compel it to
purchase the terminal at fair market
value, per Section 8.06(b) of the CA.
10. Under the DCA, any delay by
Piatco in the payment of the amounts
due
the
government
constitutes
breach of contract. However, under
the CA, such delay does not
necessarily
constitute
breach
of
contract, since Piatco is permitted to
suspend payments to the government
in order to first satisfy the claims of its
secured creditors, per Section 8.04(d)
of the CA.
It goes without saying that the amendment of
the Contract bidded out (the DCA or draft
concession agreement) - in such substantial
manner, without any public bidding, and after
the bidding process had been concluded on
December 11, 1996 - is violative of public

policy on public biddings, as well as the spirit

and intent of the BOT Law. The whole point of
going through the public bidding exercise
was completely lost. Its very rationale was
totally subverted by permitting Piatco to
amend the contract for which public bidding
had already been concluded. Competitive
bidding aims to obtain the best deal possible
by fostering transparency and preventing
favoritism, collusion and fraud in the
awarding of contracts. That is the reason why
procedural rules pertaining to public bidding
demand strict observance.26
In a relatively early case, Caltex v. Delgado
Brothers,27 this Court made it clear that
substantive amendments to a contract for
which a public bidding has already been
finished should only be awarded after another
public bidding:
"The due execution of a contract after
public bidding is a limitation upon the
right of the contracting parties to alter
or amend it without another public
bidding, for otherwise what would a
public bidding be good for if after the
execution of a contract after public
bidding, the contracting parties may
alter or amend the contract, or even
cancel it, at their will? Public biddings
are held for the protection of the
public, and to give the public the best
possible advantages by means of open
competition between the bidders. He
who bids or offers the best terms is
awarded the contract subject of the
bid, and it is obvious that such
protection
and
best
possible
advantages
to
the
public
will
disappear if the parties to a contract
executed after public bidding may
alter or amend it without another
previous public bidding."28

The aforementioned case dealt with the

unauthorized amendment of a contract
executed after public bidding; in the situation
before us, the amendments were made also
after the bidding, but prior to execution. Be
that as it may, the same rationale underlying
Caltex applies to the present situation with
equal force. Allowing the winning bidder to
renegotiate the contract for which the bidding
process has ended is tantamount to
permitting it to put in anything it wants. Here,
the winning bidder (Piatco) did not even
bother to wait until after actual execution of
the contract before rushing to amend it.
Perhaps it believed that if the changes were
made to a contract already won through
bidding (DCA) instead of waiting until it is
executed, the amendments would not be
noticed or discovered by the public.
In a later case, Mata v. San Diego,29 this Court
reiterated its ruling as follows:
"It is true that modification of
government contracts, after the same
had been awarded after a public
bidding, is not allowed because such
modification serves to nullify the
effects of the bidding and whatever
advantages the Government had
secured thereby and may also result in
manifest injustice to the other bidders.
This prohibition, however, refers to a
change
in
vital
and
essential
particulars of the agreement which
results
in
a
substantially
new
contract."
Piatco's counter-argument may be summed
up thus: There was nothing in the 1994 IRR
that prohibited further negotiations and
eventual amendments to the DCA even after
the bidding had been concluded. In fact, PBAC
Bid Bulletin No. 3 states: "[A]mendments to

the Draft Concession Agreement shall be

issued from time to time. Said amendments
will only cover items that would not
materially affect the preparation of the
proponent's proposal."
I submit that accepting such warped
argument will result in perverting the policy
underlying public bidding. The BOT Law
cannot be said to allow the negotiation of
contractual stipulations resulting in a
substantially new contract after the bidding
process and price challenge had been
concluded. In fact, the BOT Law, in
recognition of the time, money and effort
invested in an unsolicited proposal, accords
its originator the privilege of matching the
challenger's bid.
Section 4-A of the BOT Law specifically refers
to a "lower price proposal" by a competing
bidder; and to the right of the original
proponent "to match the price" of the
challenger. Thus, only the price proposals are
in
play.
Theterms,
conditions
and
stipulations in the contract for which public
bidding has been concluded are understood
toremain intact and not be subject to further
negotiation. Otherwise, the very essence of
public bidding will be destroyed - there will be
no basis for an exact comparison between
bids.
Moreover, Piatco misinterpreted the meaning
behind PBAC Bid Bulletin No. 3. The
phrase amendments . . . from time to
time refers only to those amendments to the
draft concession agreement issued by the
PBAC prior to the submission of the price
challenge; it certainly does not include or
permit amendments negotiated for and
introduced after the bidding process, has
been terminated.

Piatco's Concession Agreement Was

Further Amended, (ARCA) Again Without
Public Bidding
Not satisfied with the Concession Agreement,
Piatco - once more without bothering with
public bidding - negotiated with government
for still more substantial changes. The result
was the Amended and Restated Concession
Agreement (ARCA) executed on November
26, 1998. The following changes were
introduced:
1.
The
definition
of Attendant
Liabilities was further amended with
the result that the unpaid loans of
Piatco, for which government may be
required to answer, are no longer
limited to only those loans recorded in
Piatco's books
or loans whose
proceeds were actually used in the
Terminal III project.30
2. Although the contract may be
terminated due to breach by Piatco, it
will not be liable to pay the
government any Liquidated Damages
if a new operator is designated to take
over the operation of the terminal.31
3. The Liquidated Damages which
government becomes liable for in case
of its breach of contract were
substantially increased.32
4. Government's right to appoint a
comptroller for Piatco in case the latter
encounters liquidity problems was
deleted.33
5. Government is made liable for
Incremental and Consequential Costs
and Losses in case it fails to comply or

cause any third party under its direct

or indirect control to comply with the
special
obligations
imposed
on
government.34
6. The insurance policies obtained by
Piatco covering the terminal are now
required to be assigned to the Senior
Lenders as security for the loans;
previously, their proceeds were to be
used to repair and rehabilitate the
facility in case of damage.35
7. Government bound itself to set the
initial rate of the terminal fee, to be
charged when Terminal III begins
operations, at an amount higher than
US$20.36
8. Government waived its defense of
the illegality of the contract and even
agreed to be liable to pay damages to
Piatco in the event the contract was
declared illegal.37
9. Even though government may be
entitled to terminate the ARCA on
account
of
breach
by
Piatco,
government is still liable to pay Piatco
the appraised value of Terminal III or
the Attendant Liabilities, if the
termination occurs before the InService
Date.38 This
condition
contravenes the BOT Law provision on
termination compensation.
10. Government is obligated to take
the administrative action required for
Piatco's imposition, collection and
application
of
all
Public
Utility
Revenues.39 No such obligation existed
previously.

11. Government is now also obligated

to perform and cause other persons
and entities under its direct or indirect
control to perform all acts necessary
to perfect the security interests to be
created in favor of Piatco's Senior
Lenders.40 No such obligation existed
previously.
12. DOTC/MIAA's right of intervention
in instances where Piatco's Non-Public
Utility Revenues become exorbitant or
excessive has been removed.41
13. The illegality and unenforceability
of the ARCA or any of its material
provisions was made an event of
default on the part of government
only, thus constituting a ground for
Piatco to terminate the ARCA.42
14. Amounts due from and payable by
government under the contract were
made payable on demand - net of
taxes, levies, imposts, duties, charges
or fees of any kind except as required
by law.43
15. The Parametric Formula in the
contract, which is utilized to compute
for adjustments/increases to the public
utility revenues (i.e., aircraft parking
and tacking fees, check-in counter fee
and terminal fee), was revised to
permit Piatco to input its more costly
short-term borrowing rates instead of
the
longer-terms
rates
in
the
computations for adjustments, with
the end result that the changes will
redound to its greater financial
benefit.

16. The Certificate of Completion

simply
deleted
the
successful
performance-testing of the terminal
facility in accordance with defined
performance standards as a precondition for government's acceptance
of the terminal facility.44
In sum, the foregoing revisions and
amendments as embodied in the ARCA
constitute very material alterations of the
terms and conditions of the CA, and give
further manifestly undue advantage to Piatco
at the expense of government. Piatco claims
that the changes to the CA were necessitated
by the demands of its foreign lenders.
However, no proof whatsoever has been
adduced to buttress this claim.
In any event, it is quite patent that the sum
total of the aforementioned changes resulted
in drastically
weakeningthe
position
of
government to a degree that seems quite
excessive, even from the standpoint of a
businessperson who regularly transacts with
banks and foreign lenders, is familiar with
their mind-set, and understands what
motivates them. On the other hand, whatever
it was that impelled government officials
concerned to accede to those grossly
disadvantageous changes, I can only hazard a
guess.
There is no question in my mind that the
ARCA was unauthorized and illegal for lack of
public bidding and for being patently
disadvantageous to government.
The Three Supplements Imposed New
Obligations
on
Government,
Also
Without Prior Public Bidding

After Piatco had managed to breach the

protective rampart of public bidding, it
recklessly went on a rampage of further
assaults on the ARCA.
The First Supplement Is as Void as the ARCA
In the First Supplement ("FS") executed on
August 27, 1999, the following changes were
made to the ARCA:
1. The amounts payable by Piatco to
government were reduced by allowing
additional exceptions to the Gross
Revenues in which government is
supposed to participate.45
2. Made part of the properties which
government is obliged to construct
and/or maintain and keep in good
repair are (a) the access road
connecting Terminals II and III - the
construction of this access road is the
obligation of Piatco, in lieu of its
obligation to construct an Access
Tunnel connecting Terminals II and III;
and (b) the taxilane and taxiway these are likewise part of Piatco's
obligations, since they are part and
parcel of the project as described in
Clause 1.3 of the Bid Documents .46
3. The MIAA is obligated to provide
funding for the maintenance and
repair of the airports and facilities
owned or operated by it and by third
persons under its control. It will also
be liable to Piatco for the latter's
losses, expenses and damages as well
as liability to third persons, in case
MIAA fails to perform such obligations.
In addition, MIAA will also be liable for
the incremental and consequential

costs of the remedial work done by

Piatco on account of the former's
default.47
4. The FS also imposed on government
ten
(10)
"Additional
Special
Obligations," including the following:
(a) Working for the removal of
the general aviation traffic from
the NAIA airport complex48
(b) Providing through MIAA the
land required by Piatco for the
taxilane and one taxiway at no
cost to Piatco49
(c)
Implementing
government's existing
drainage master plan50

the
storm

(d) Coordinating with DPWH the

financing, the implementation
and the completion of the
following works before the InService Date: three left-turning
overpasses (EDSA to Tramo St.,
Tramo to Andrews Ave., and
Manlunas
Road
to
Sales
Ave.);51 and a road upgrade and
improvement
program
involving widening, repair and
resurfacing of Sales Road,
Andrews Avenue and Manlunas
Road; improvement of Nichols
Interchange; and removal of
squatters
along
Andrews
Avenue.52
(e) Dealing directly with BCDA
and the Phil. Air Force in
acquiring additional land or
right of way for the road

upgrade
and
program.53

improvement

The Second Supplement Is Similarly Void

and Inexistent

5. Government is required to work for

the immediate reversion to MIAA of
the Nayong Pilipino National Park.54

The Second Supplement ("SS") was executed

between the government and Piatco on
September 4, 2000. It calls for Piatco, acting
not as concessionaire of NAIA Terminal III but
as a public works contractor, to undertake - in
the government's stead - the clearing,
removal,
demolition
and
disposal
of
improvements, subterranean obstructions
and waste materials at the project site.57

6. Government's share in the terminal

fees collected was revised from a flat
rate of P180 to 36 percent thereof;
together
with
government's
percentage share in the gross
revenues of Piatco, the amount will be
remitted to government in pesos
instead
of
US
dollars.55 This
amendment enables Piatco to benefit
from the further erosion of the pesodollar exchange rate, while preventing
government from building up its
foreign exchange reserves.
7. All payments from Piatco to
government are now to be invoiced to
MIAA, and payments are to accrue to
the latter's exclusive benefit.56 This
move appears to be in support of the
funds MIAA advanced to DPWH.
I must emphasize that the First Supplement is
void in two respects. First, it is merely an
amendment to the ARCA, upon which it is
wholly dependent; therefore, since the ARCA
is void, inexistent and not capable of being
ratified or amended, it follows that the FS too
is void, inexistent and inoperative. Second,
even assuming arguendo that the ARCA is
somehow remotely valid, nonetheless the FS,
in imposing significant new obligations upon
government, altered the fundamental terms
and
stipulations
of
the
ARCA,
thus
necessitating a public bidding all over again.
That the FS was entered into sans public
bidding
renders
it
utterly
void
and
inoperative.

The scope of the works, the procedures

involved, and the obligations of the contractor
are provided for in Parts II and III of the SS.
Section 4.1 sets out the compensation to be
paid, listing specific rates per cubic meter of
materials for each phase of the work excavation, leveling, removal and disposal,
backfilling and dewatering. The amounts
collectible by Piatco are to be offset against
the Annual Guaranteed Payments it must pay
government.
Though denominated as Second Supplement,
it was nothing less than an entirely new
public works contract. Yet it, too, did not
undergo any public bidding, for which reason
it is also void and inoperative.
Not surprisingly, Piatco had to subcontract
the works to a certain Wintrack Builders, a
firm reputedly owned by a former highranking DOTC official. But that is another
story altogether.
The Third Supplement Is Likewise Void
and Inexistent
The Third Supplement ("TS"), executed
between the government and Piatco on June
22, 2001, passed on to the government

certain obligations of Piatco as Terminal III

concessionaire, with respect to the surface
road connecting Terminals II and III.
By way of background, at the inception of and
forming part of the NAIA Terminal III project
was the proposed construction of an access
tunnel crossing Runway 13/31, which. would
connect Terminal III to Terminal II. The Bid
Documents in Section 4.1.2.3[B][i] declared
that the said access tunnel was subject to
further negotiation; but for purposes of the
bidding, the proponent should submit a bid
for it as well. Therefore, the tunnel was
supposed to be part and parcel of the
Terminal III project.
However, in Section 5 of the First
Supplement, the parties declared that the
access tunnel was not economically viable at
that time. In lieu thereof, the parties agreed
that a surface access road (now called the T2T3 Road) was to be constructed by Piatco to
connect the two terminals. Since it was
plainly in substitution of the tunnel, the
surface road construction should likewise be
considered part and parcel of the same
project, and therefore part of Piatco's
obligation as well. While the access tunnel
was estimated to cost about P800 million, the
surface road would have a price tag in the
vicinity of about P100 million, thus producing
significant savings for Piatco.
Yet, the Third Supplement, while confirming
that Piatco would construct the T2-T3 Road,
nevertheless shifted to government some of
the obligations pertaining to the former, as
follows:
1. Government is now obliged to
remove at its own expense all tenants,
squatters, improvements and/or waste
materials on the site where the T2-T3

road is to be constructed. 58 There was

no similar obligation on the part of
government insofar as the access
tunnel was concerned.
2. Should government fail to carry out
its obligation as above described,
Piatco
may
undertake
it
on
government's behalf, subject to the
terms
and
conditions
(including
compensation payments) contained in
the Second Supplement.59
3. MIAA will answer for the operation,
maintenance and repair of the T2-T3
Road.60
The TS depends upon and is intended to
supplement the ARCA as well as the First
Supplement, both of which are void and
inexistent and not capable of being ratified or
amended. It follows that the TS is likewise
void, inexistent and inoperative. And even if,
hypothetically speaking, both ARCA and FS
are valid, still, the Third Supplement imposing as it does significant new
obligations upon government - would in effect
alter the terms and stipulations of the ARCA
in material respects, thus necessitating
another public bidding. Since the TS was not
subjected to public bidding, it is consequently
utterly void as well. At any rate, the TS
created new monetary obligations on the part
of government, for which there were no prior
appropriations. Hence it follows that the same
is void ab initio.
In patiently tracing the progress of the Piatco
contracts from their inception up to the
present, I noted that the whole process was
riddled with significant lapses, if not outright
irregularity and wholesale violations of law
and public policy. The rationale of beginning
at the beginning, so to speak, will become

evident when the question of what to do with

the five Piatco contracts is discussed later on.
In the meantime, I shall take up specific,
provisions or changes in the contracts and
highlight the more prominent objectionable
features.
Government Directly Guarantees Piatco
Debts
Certainly the most discussed provision in the
parties' arguments is the one creating an
unauthorized, direct government guarantee
of Piatco's obligations in favor of the lenders.
Section 4-A of the BOT Law as amended
states that unsolicited proposals, such as the
NAIA Terminal III Project, may be accepted by
government provided inter alia that no
direct government guarantee, subsidy or
equity is required. In short, such guarantee is
prohibited in unsolicited proposals. Section
2(n) of the same legislationdefines direct
government guarantee as "an agreement
whereby the government or any of its
agencies or local government units (will)
assume responsibility for the repayment of
debt directly incurred by the project
proponent in implementing the project in case
of a loan default."
Both the CA and the ARCA have provisions
that undeniably create such prohibited
government guarantee. Section 4.04 (c)(iv) to
(vi) of the ARCA, which is similar to Section
4.04 of the CA, provides thus:
"(iv) that if Concessionaire is in default
under a payment obligation owed to
the Senior Lenders, and as a result
thereof the Senior Lenders have
become entitled to accelerate the

Senior Loans, the Senior Lenders shall

have the right to notify GRP of the
same . . .;
(v) . . . the Senior Lenders may after
written notification to GRP, transfer
the
Concessionaire's
rights
and
obligations to a transferee . . .;
(vi) if the Senior Lenders . . . are
unable to . . . effect a transfer . . .,
then GRP and the Senior Lenders shall
endeavor . . . to enter into any other
arrangement
relating
to
the
Development Facility . . . If no
agreement
relating
to
the
Development Facility is arrived at by
GRP and the Senior Lenders within the
said 180-day period, then at the end
thereof the Development Facility shall
be transferred by the Concessionaire
to GRP or its designee and GRP shall
make a termination payment to
Concessionaire equal to the Appraised
Value (as hereinafter defined) of the
Development Facility or the sum of the
Attendant Liabilities, if greater. . . ."
In turn, the term Attendant Liabilities is
defined in Section 1.06 of the ARCA as
follows:
"Attendant Liabilities refer to all
amounts in each case supported by
verifiable evidence from time to time
owed or which may become, owing by
Concessionaire to Senior Lenders or
any other persons or entities who have
provided, loaned or advanced funds or
provided
financial
facilities
to
Concessionaire
for
the
Project,
including,
without
limitation,
all
principal, interest, associated fees,
charges, reimbursements, and other

related expenses (including the fees,

charges and expenses of any agents
or trustees of such persons or
entities), whether payable at maturity,
by acceleration or otherwise, and
further including amounts owed by
Concessionaire to its professional
consultants and advisers, suppliers,
contractors and sub-contractors."
Government's agreement to pay becomes
effective in the event of a default by Piatco
on any of its loan obligations to the Senior
Lenders, and the amount to be paid by
government is the greater of either the
Appraised Value of Terminal III or the
aggregate amount of the moneys owed
by Piatco - whether to the Senior Lenders or
to other entities, including its suppliers,
contractors and subcontractors. In effect,
therefore, this agreement already constitutes
the prohibited assumption by government of
responsibility for repayment of Piatco's debts
in case of a loan default. In fine, a direct
government guarantee.
It matters not that there is a roundabout
procedure prescribed by Section 4.04(c)(iv),
(v) and (vi) that would require, first, an
attempt (albeit unsuccessful) by the Senior
Lenders to transfer Piatco's rights to a
transferee of their choice; and, second, an
effort (equally unsuccessful) to "enter into
any other arrangement" with the government
regarding the Terminal III facility, before
government is required to make good on its
guarantee. What is abundantly clear is the
fact that, in the devious labyrinthine process
detailed in the aforesaid section, it is entirely
within the Senior Lenders' power, prerogative
and control - exercisable via a mere refusal or
inability to agree upon "a transferee" or "any
other arrangement" regarding the terminal
facility - to push the process forward to the

ultimate contractual cul-de-sac, wherein

government will be compelled to abjectly
surrender and make good on its guarantee of
payment.
Piatco also argues that there is no proviso
requiring government to pay the Senior
Lenders in the event of Piatco's default. This
is literally true, in the sense that Section
4.04(c)(vi) of ARCA speaks of government
making the termination payment to Piatco,
not to the lenders. However, it is almost a
certainty that the Senior Lenders will already
have made Piatco sign over to them, ahead of
time, its right to receive such payments from
government; and/or they may already have
had themselves appointed its attorneys-infact for the purpose of collecting and
receiving such payments.
Nevertheless, as petitioners-in-intervention
pointed out in their Memorandum, 61 the
termination payment is to be made to Piatco,
not to the lenders; and there is no provision
anywhere in the contract documents to
prevent it from diverting the proceeds to its
own benefit and/or to ensure that it will
necessarily use the same to pay off the
Senior Lenders and other creditors, in order to
avert the foreclosure of the mortgage and
other liens on the terminal facility. Such
deficiency puts the interests of government at
great risk. Indeed, if the unthinkable were to
happen, government would be paying several
hundreds of millions of dollars, but the
mortgage liens on the facility may still be
foreclosed by the Senior Lenders just the
same.
Consequently, the Piatco contracts are also
objectionable for grievously failing to
adequately protect government's interests.
More accurately, the contracts would
consistently weaken and do away with

protection of government interests. As such,

they are therefore grossly lopsided in favor of
Piatco and/or its Senior Lenders.
While on this subject, it is well to recall the
earlier discussion regarding a particularly
noticeable alteration of the concept of
"Attendant Liabilities." In Section 1.06 of the
CA defining the term, the Piatco debts to be
assumed/paid by government were qualified
by the phrases recorded and from time to
time outstanding in the books of the
Concessionaire and actually used for the
project. These phrases were eliminated from
the ARCA's definition of Attendant Liabilities.
Since no explanation has been forthcoming
from Piatco as to the possible justification for
such a drastic change, the only conclusion,
possible is that it intends to have all of its
debts covered by the guarantee, regardless of
whether or not they are disclosed in its books.
This has particular reference to those
borrowings which were obtained in violation
of the loan covenants requiring Piatco to
maintain a minimum 70:30 debt-to-equity
ratio, and even if the loan proceeds were not
actually used for the project itself.
This point brings us back to the guarantee
itself. In Section 4.04(c)(vi) of ARCA, the
amount which government has guaranteed to
pay as termination payment is the greater of
either (i) the Appraised Value of the terminal
facility or (ii) the aggregate of the Attendant
Liabilities. Given that the Attendant Liabilities
may include practically any Piatco debt under
the sun, it is highly conceivable that their sum
may greatly exceed the appraised value of
the facility, and government may end up
paying very much more than the real worth of
Terminal III. (So why did government have to
bother with public bidding anyway?)

In the final analysis, Section 4.04(c)(iv) to (vi)

of the ARCA is diametrically at odds with the
spirit and the intent of the BOT Law. The law
meant to mobilize private resources (the
private sector) to take on the burden and the
risks of financing the construction, operation
and maintenance of relevant infrastructure
and development projects for the simple
reason that government is not in a position to
do so. By the same token, government
guarantee was prohibited, since it would
merely defeat the purpose and raison d'tre
of a build-operate-and-transfer project to be
undertaken by the private sector.
To the extent that the project proponent is
able to obtain loans to fund the project, those
risks are shared between the project
proponent on the one hand, and its banks and
other lenders on the other. But where the
proponent or its lenders manage to cajol or
coerce the government into extending a
guarantee of payment of the loan obligations,
the risks assumed by the lenders are passed
right back to government. I cannot
understand why, in the instant case,
government cheerfully assented to reassuming the risks of the project when it gave
the prohibited guarantee and thus simply
negated the very purpose of the BOT Law and
the protection it gives the government.
Contract Termination Provisions in the
Piatco Contracts Are Void
The BOT Law as amended provides for
contract termination as follows:
"Sec. 7. Contract Termination. - In the
event that a project is revoked,
cancelled or terminated by the
government through no fault of the
project proponent or by mutual
agreement, the Government shall

compensate
the
said
project
proponent for its actual expenses
incurred in the project plus a
reasonable rate of return thereon not
exceeding that stated in the contract
as of the date of such revocation,
cancellation or termination: Provided,
That the interest of the Government in
this instances [sic] shall be duly
insured with the Government Service
Insurance System or any other
insurance entity duly accredited by the
Office
of
the
Insurance
Commissioner: Provided, finally, That
the cost of the insurance coverage
shall be included in the terms and
conditions of the bidding referred to
above.
"In the event that the government
defaults on certain major obligations in
the contract and such failure is not
remediable or if remediable shall
remain
unremedied
for
an
unreasonable length of time, the
project proponent/contractor may, by
prior notice to the concerned national
government
agency
or
local
government unit specifying the turnover date, terminate the contract. The
project proponent/contractor shall be
reasonably compensated by
the
Government
for
equivalent
or
proportionate contract cost as defined
in the contract."
The foregoing statutory provision in effect
provides for the following limited instances
when termination compensation may be
allowed:
1. Termination by the government
through no fault of the project
proponent

2. Termination upon
mutual agreement

the

parties'

3. Termination by the proponent due to

government's default on certain major
contractual obligations
To emphasize, the law does not permit
compensation for the project proponent when
contract
termination
is
due
to
the
proponent's own fault or breach of contract.
This principle was clearly violated in the
Piatco Contracts. The ARCA stipulates that
government
is
to
pay
termination
compensation
to
Piatco
even
when termination is initiated by government
for the following causes:
"(i) Failure of Concessionaire to finish
the Works in all material respects in
accordance with the Tender Design
and the Timetable;
(ii) Commission by Concessionaire of a
material breach of this Agreement . . .;
(iii) . . . a change in control of
Concessionaire arising from the sale,
assignment,
transfer
or
other
disposition of capital stock which
results in an ownership structure
violative of statutory or constitutional
limitations;
(iv) A pattern of continuing or
repeated
non-compliance,
willful
violation, or non-performance of other
terms and conditions hereof which is
hereby deemed a material breach of
this Agreement . . ."62

As if that were not bad enough, the ARCA also

inserted into Section 8.01 the phrase "Subject
to Section 4.04." The effect of this insertion is
that in those instances where government
may terminate the contract on account of
Piatco's breach, and it is nevertheless
required under the ARCA to make termination
compensation
to
Piatco
even
though
unauthorized by law, such compensation is to
be equivalent to the payment amount
guaranteed by government - either a) the
Appraised Value of the terminal facility or (b)
the aggregate of the Attendant Liabilities,
whichever amount is greater!
Clearly, this condition is not in line with
Section 7 of the BOT Law. That provision
permits a project proponent to recover the
actual expenses it incurred in the prosecution
of the project plus a reasonable rate of return
not in excess of that provided in the contract;
or to be compensated for the equivalent or
proportionate contract cost as defined in the
contract, in case the government is in default
on certain major contractual obligations.
Furthermore, in those instances where such
termination compensation is authorized by
the BOT Law, it is indispensable that the
interest of government be duly insured.
Section 5.08 the ARCA mandates insurance
coverage for the terminal facility; but all
insurance policies are to be assigned, and all
proceeds are payable, to the Senior Lenders.
In brief, the interest being secured by such
coverage is that of the Senior Lenders, not
that of government. This can hardly be
considered compliance with law.
In essence, the ARCA provisions on
termination compensation result in another
unauthorized government guarantee, this
time in favor of Piatco.

A Prohibited Direct Government Subsidy,

Which at the Same Time Is an Assault on
the National Honor
Still another contractual provision offensive to
law and public policy is Section 8.01(d) of the
ARCA, which is a "bolder and badder" version
of Section 8.04(d) of the CA.
It will be recalled that Section 4-A of the BOT
Law as amended prohibits not only direct
government guarantees, but likewise a direct
government subsidy for unsolicited proposals.
Section 13.2. b. iii. of the 1999 IRR defines
adirect government subsidy as encompassing
"an agreement whereby the Government . . .
will . . . postpone any payments due from the
proponent."
Despite the statutory ban, Section 8.01 (d) of
the ARCA provides thus:
"(d) The provisions of Section 8.01(a)
notwithstanding, and for the purpose
of preventing a disruption of the
operations in the Terminal and/or
Terminal Complex, in the event that at
any time Concessionaire is of the
reasonable opinion that it shall be
unable to meet a payment obligation
owed
to
the
Senior
Lenders,
Concessionaire shall give prompt
notice to GRP, through DOTC/MIAA and
to the Senior Lenders. In such
circumstances, the Senior Lenders (or
the Senior Lenders' Representative)
may ensure that after making
provision for administrative expenses
and depreciation, the cash resources
of Concessionaire shall first be used
and applied to meet all payment
obligations owed to the Senior
Lenders. Any excess cash, after
meeting such payment obligations,

shall be earmarked for the payment of

all sums payable by Concessionaire to
GRP under this Agreement. If by
reason of the foregoing GRP should be
unable to collect in full all payments
due to GRP under this Agreement,
then the unpaid balance shall be
payable within a 90-day grace period
counted from the relevant due date,
with interest per annum at the rate
equal to the average 91-day Treasury
Bill Rate as of the auction date
immediately preceding the relevant
due date. If payment is not effected by
Concessionaire
within
the
grace
period, then a spread of five (5%)
percent over the applicable 91-day
Treasury Bill Rate shall be added on
the unpaid amount commencing on
the expiry of the grace period up to
the day of full payment. When the
temporary illiquidity of Concessionaire
shall have been corrected and the
cash position of Concessionaire should
indicate its ability to meet its maturing
obligations, then the provisions set
forth under this Section 8.01(d) shall
cease to apply. The foregoing remedial
measures shall be applicable only
while there remains unpaid and
outstanding amounts owed to the
Senior Lenders." (Emphasis supplied)
By any manner of interpretation or
application, Section 8.01(d) of the ARCA
clearly mandates the indefinitepostponement
of payment of all of Piatco's obligations to the
government, in order to ensure that Piatco's
obligations to the Senior Lenders are paid in
full first. That is nothing more or less than the
direct government subsidy prohibited by the
BOT Law and the IRR. The fact that Piatco will
pay interest on the unpaid amounts owed to
government does not change the situation or

render the prohibited

unacceptable.

subsidy

any

less

But beyond the clear violations of law, there

are larger issues involved in the ARCA. Earlier,
I mentioned that Section 8.01(d) of the ARCA
completely eliminated the proviso in Section
8.04(d) of the CA which gave government the
right to appoint a financial controller to
manage the cash position of Piatco during
situations of financial distress. Not only has
government been deprived of any means of
monitoring and managing the situation;
worse, as can be seen from Section 8.01(d)
above-quoted, the Senior Lenders have
effectively locked in on the right to exercise
financial controllership over Piatco and to
allocate its cash resources to the payment of
all amounts owed to the Senior Lenders
before allowing any payment to be made to
government.
In brief, this particular provision of the ARCA
has placed in the hands of foreign lenders the
power and the authority to determine how
much (if at all) and when the Philippine
government (as grantor of the franchise) may
be allowed to receive from Piatco. In that
situation, government will be at the mercy of
the foreign lenders. This is a situation
completely contrary to the rationale of the
BOT Law and to public policy.
The aforesaid provision rouses mixed
emotions - shame and disgust at the
parties' (especially the government
officials') docile submission and abject
servitude
and
surrender
to
the
imperious and excessive demands of the
foreign lenders, on the one hand; and
vehement outrage at the affront to the
sovereignty of the Republic and to the
national honor, on the other. It is indeed

time to put an end to such

unbearable, dishonorable situation.

an

The Piatco Contracts Unarguably Violate

Constitutional Injunctions
I will now discuss the manner in which the
Piatco Contracts offended the Constitution.
The Exclusive Right Granted to Piatco to
Operate a Public Utility Is Prohibited by the
Constitution
While Section 2.02 of the ARCA spoke of
granting to Piatco "a franchise to operate and
maintain the Terminal Complex," Section
3.02(a) of the same ARCA granted to Piatco,
for the entire term of the concession
agreement, "the exclusive right to operate
a
commercial
international
passenger
terminal within the Island of Luzon" with the
exception of those three terminals already
existing63 at the time of execution of the
ARCA.
Section 11 of Article XII of the Constitution
prohibits the grant of a "franchise, certificate,
or any other form of authorization for the
operation of a public utility" that is "exclusive
in character."
In its Opinion No. 078, Series of 1995, the
Department of justice held that "the NAIA
Terminal III which . . . is a 'terminal for public
use' is a public utility." Consequently, the
constitutional
prohibition
against
the
exclusivity of a franchise applies to the
franchise for the operation of NAIA Terminal III
as well.
What was granted to Piatco was not merely a
franchise, but an "exclusive right" to operate
an international passenger terminal within the

"Island of Luzon." What this grant effectively

means is that the government is now
estopped from exercising its inherent power
to award any other person another franchise
or a right to operate such a public utility, in
the event public interest in Luzon requires it.
This restriction is highly detrimental to
government and to the public interest. Former
Secretary of Justice Hernando B. Perez
expressed this point well in his Memorandum
for the President dated 21 May 2002:
"Section 3.02 on 'Exclusivity'
"This provision gives to PIATCO (the
Concessionaire) the exclusive right to
operate a commercial international
airport within the Island of Luzon with
the exception of those already existing
at the time of the execution of the
Agreement, such as the airports at
Subic, Clark and Laoag City. In the
case of the Clark International Airport,
however, the provision restricts its
operation beyond its design capacity
of 850,000 passengers per annum and
the operation of new terminal facilities
therein until after the new NAIA
Terminal III shall have consistently
reached or exceeded its design
capacity of ten (10) million passenger
capacity per year for three (3)
consecutive
years
during
the
concession period.
"This
is
an
onerous
and
disadvantageous
provision.
It
effectively grants PIATCO a monopoly
in Luzon and ties the hands of
government
in
the
matter
of
developing new airports which may be
found expedient and necessary in
carrying out any future plan for an

inter-modal transportation system in

Luzon.
"Additionally,
it
imposes
an
unreasonable
restriction
on
the
operation of the Clark International
Airport which could adversely affect
the operation and development of the
Clark Special Economic Zone to the
economic prejudice of the local
constituencies
that
are
being
benefited by its operation." (Emphasis
supplied)
While it cannot be gainsaid that an enterprise
that is a public utility may happen to
constitute a monopoly on account of the very
nature of its business and the absence of
competition, such a situation does not
however constitute justification to violate the
constitutional
prohibition
and
grant
an exclusive franchise or exclusive right to
operate a public utility.
Piatco's contention that the Constitution does
not actually prohibit monopolies is beside the
point. As correctly argued,64 the existence of a
monopoly by a public utility is a situation
created by circumstances that do not
encourage competition. This situation is
different from the grant of a franchise to
operate a public utility, a privilege granted by
government. Of course, the grant of a
franchise may result in a monopoly. But
making such franchise exclusive is what is
expressly proscribed by the Constitution.
Actually, the aforementioned Section 3.02 of
the ARCA more than just guaranteed
exclusivity; it also guaranteed that the
government will not improve or expand the
facilities at Clark - and in fact is required to
put a cap on the latter's operations - until
after Terminal III shall have been operated at

or
beyond
its
peak
capacity
for
threeconsecutive years.65 As
counsel
for
public respondents pointed out, in the real
world where the rate of influx of international
passengers can fluctuate substantially from
year to year, it may take many years before
Terminal III sees three consecutive years'
operations at peak capacity. The Diosdado
Macapagal International Airport may thus end
up stagnating for a long time. Indeed, in order
to ensure greater profits for Piatco, the
economic progress of a region has had to be
sacrificed.
The Piatco Contracts Violate the Time
Limitation on Franchises
Section 11 of Article XII of the Constitution
also provides that "no franchise, certificate or
any other form of authorization for the
operation of a public utility shall be . . . for a
longer period than fifty years." After all, a
franchise held for an unreasonably long time
would likely give rise to the same evils as a
monopoly.
The Piatco Contracts have come up with an
innovative way to circumvent the prohibition
and obtain an extension. This fact can be
gleaned from Section 8.03(b) of the ARCA,
which I quote thus:
"Sec. 8.03. Termination Procedure and
Consequences of Termination. a) x x x

xxx

xxx

b) In the event the Agreement

is terminated pursuant to
Section
8.01
(b)
hereof,
Concessionaire shall be entitled
to
collect
the
Liquidated
Damages specified in Annex

'G'. The full payment by GRP to

Concessionaire
of
the
Liquidated Damages shall be a
condition precedent to the
transfer by Concessionaire to
GRP
of
the
Development
Facility. Prior to the full
payment of the Liquidated
Damages, Concessionaire shall
to
the
extent
practicable
continue
to
operate
the
Terminal and the Terminal
Complex and shall be entitled
to retain and withhold all
payments to GRP for the
purpose of offsetting the same
against
the
Liquidated
Damages. Upon full payment of
the
Liquidated
Damages,
Concessionaire
shall
immediately
transfer
the
Development Facility to GRP on
'as-is-where-is' basis."
The aforesaid easy payment scheme is less
beneficial than it first appears. Although it
enables government to avoid having to make
outright payment of an obligation that will
likely run into billions of pesos, this easy
payment
plan
will
nevertheless
cost
government considerable loss of income,
which it would earn if it were to operate
Terminal III by itself. Inasmuch as payments to
the concessionaire (Piatco) will be on
"installment basis," interest charges on the
remaining unpaid balance would undoubtedly
cause the total outstanding balance to swell.
Piatco would thus be entitled to remain in the
driver's seat and keep operating the terminal
for an indefinite length of time.
The Contracts Create Two Monopolies for
Piatco

By way of background, two monopolies were

actually created by the Piatco contracts. The
first and more obvious one refers to the
business
of operating
an
international
passenger terminal in Luzon, the business
end of which involves providing international
airlines with parking space for their aircraft,
and airline passengers with the use of
departure
and arrival
areas, check-in
counters, information systems, conveyor
systems,
security
equipment
and
paraphernalia, immigrations and customs
processing areas; and amenities such as
comfort rooms, restaurants and shops.
In furtherance of the first monopoly, the
Piatco Contracts stipulate that the NAIA
Terminal III will be the only facility to be
operated as an international passenger
terminal;66 that NAIA Terminals I and II will no
longer be operated as such;67 and that no one
(including the government) will be allowed to
compete with Piatco in the operation of an
international passenger terminal in the NAIA
Complex.68 Given that, at this time, the
government and Piatco are the only ones
engaged in the business of operating an
international passenger terminal, I am not
acutely concerned with this particular
monopolistic situation.
There was however another monopoly within
the NAIA created by the subject contracts for
Piatco - in the business of providing
international
airlines
with
the
following: groundhandling, in-flight catering,
cargo handling, and aircraft repair and
maintenance services. These are lines of
business activity in which are engaged many
service providers (including the petitioners-inintervention), who will be adversely affected
upon full implementation of the Piatco
Contracts, particularly Sections 3.01(d)69 and
(e)70 of both the ARCA and the CA.

On the one hand, Section 3.02(a) of the ARCA

makes Terminal III the only international
passenger terminal at the NAIA, and therefore
the only place within the NAIA Complex where
the business of providing airport-related
services to international airlines may be
conducted. On the other hand, Section
3.01(d) of the ARCA requires government,
through the MIAA, not to allow service
providers with expired MIAA contracts to
renew or extend their contracts to render
airport-related services to airlines. Meanwhile,
Section 3.01(e) of the ARCA requires
government, through the DOTC and MIAA, not
to allow service providers - those with
subsisting
concession
agreements
for
services and operations being conducted at
Terminal I - to carry over their concession
agreements, services and operations to
Terminal III, unless they first enter into a
separate agreement with Piatco.
The aforementioned provisions vest in Piatco
effective and exclusive control over which
service provider may and may not operate at
Terminal III and render the airport-related
services needed by international airlines. It
thereby possesses the power to exclude
competition. By necessary implication, it also
has effective control over the fees and
charges that will be imposed and collected by
these service providers.
This intention is exceedingly clear in the
declaration by Piatco that it is "completely
within its rights to exclude any party that it
has not contracted with from NAIA Terminal
III."71
Worse, there is nothing whatsoever in the
Piatco Contracts that can serve to restrict,
control or regulate the concessionaire's
discretion and power to reject any service
provider and/or impose any term or condition

it may see fit in any contract it enters into

with a service provider. In brief, there is no
safeguard whatsoever to ensure free and fair
competition in the service-provider sector.
In the meantime, and not surprisingly, Piatco
is first in line, ready to exploit the unique
business opportunity. It announced 72 that it
has accredited three groundhandlers for
Terminal III. Aside from the Philippine Airlines,
the other accredited entities are the
Philippine Airport and Ground Services
Globeground, Inc. ("PAGSGlobeground") and
the Orbit Air Systems, Inc. ("Orbit").
PAGSGlobeground
is
a
wholly-owned
subsidiary of the Philippine Airport and
Ground Services, Inc. or PAGS,73 while Orbit is
a wholly-owned subsidiary of Friendship
Holdings, Inc.,74which is in turn owned 80
percent by PAGS.75 PAGS is a service provider
owned 60 percent by the Cheng Family; 76 it is
a stockholder of 35 percent of Piatco77 and is
the latter's designated contractor-operator for
NAIA Terminal III.78
Such entry into and domination of the airportrelated services sector appear to be very
much in line with the following provisions
contained in the First Addendum to the Piatco
Shareholders Agreement,79 executed on July
6, 1999, which appear to constitute a sort of
master plan to create a monopoly and
combinations in restraint of trade:
"11. The Shareholders shall ensure:
a. x x x

xxx

x x x.;

b. That (Phil. Airport and Ground

Services, Inc.) PAGS and/or its
designated Affiliates shall, at all times
during the Concession Period, be
exclusively authorized by (PIATCO) to

engage in the provision of groundhandling, catering and fueling services

within the Terminal Complex.
c.
That
PAIRCARGO
and/or
its
designated Affiliate shall, during the
Concession Period, be the only entities
authorized to construct and operate a
warehouse for all cargo handling and
related services within the Site."
Precisely, proscribed by our Constitution are
the monopoly and the restraint of trade being
fostered by the Piatco Contracts through the
erection of barriers to the entry of other
service providers into Terminal III. In Tatad v.
Secretary of the Department of Energy,80 the
Court ruled:
". . . [S]ection 19 of Article XII of the
Constitution . . . mandates: 'The State
shall regulate or prohibit monopolies
when the public interest so requires.
No combinations in restraint of trade
or unfair competition shall be allowed.'
"A monopoly is a privilege or peculiar
advantage vested in one or more
persons or companies, consisting in
the exclusive right or power to carry
on a particular business or trade,
manufacture a particular article, or
control the sale or the whole supply of
a particular commodity. It is a form of
market structure in which one or only
a few firms dominate the total sales of
a product or service. On the other
hand, a combination in restraint of
trade
is
an
agreement
or
understanding between two or more
persons, in the form of a contract,
trust, pool, holding company, or other
form of association, for the purpose of
unduly
restricting
competition,

monopolizing trade and commerce in a

certain commodity, controlling its
production, distribution and price, or
otherwise interfering with freedom of
trade without statutory authority.
Combination in restraint of trade refers
to the means while monopoly refers to
the end.
"x x x

xxx

xxx

"Section 19, Article XII of our

Constitution is anti-trust in history and
in spirit. It espouses competition. The
desirability of competition is the
reason for the prohibition against
restraint of trade, the reason for the
interdiction of unfair competition, and
the
reason
for
regulation
of
unmitigated monopolies. Competition
is thus the underlying principle of
[S]ection 19, Article XII of our
Constitution, . . ."81
Gokongwei Jr. v. Securities and Exchange
Commission82 elucidates the criteria to be
employed: "A 'monopoly' embraces any
combination the tendency of which is to
prevent competition in the broad and general
sense, or to control prices to the detriment of
the public. In short, it is the concentration of
business in the hands of a few. The material
consideration in determining its existence is
not that prices are raised and competition
actually excluded, but that power exists to
raise prices or exclude competition when
desired."83 (Emphasis supplied)
The Contracts Encourage Monopolistic
Pricing, Too
Aside from creating a monopoly, the Piatco
contracts also give the concessionaire

virtually limitless power over the charging of

fees, rentals and so forth. What little
"oversight function" the government might be
able and minded to exercise is less than
sufficient to protect the public interest, as can
be gleaned from the following provisions:
"Sec. 6.06. Adjustment of Non-Public
Utility Fees and Charges
"For fees, rentals and charges
constituting
Non-Public
Utility
Revenues, Concessionaire may make
any adjustments it deems appropriate
without need for the consent of GRP or
any government agency subject to
Sec. 6.03(c)."
Section 6.03(c) in turn provides:
"(c) Concessionaire shall at all times
be judicious in fixing fees and charges
constituting
Non-Public
Utility
Revenues in order to ensure that End
Users are not unreasonably deprived
of services. While the vehicular
parking fee, porterage fee and
greeter/wellwisher fee constitute NonPublic
Utility
Revenues
of
Concessionaire, GRP may require
Concessionaire to explain and justify
the fee it may set from time to time, if
in the reasonable opinion of GRP the
said fees have become exorbitant
resulting
in
the
unreasonable
deprivation of End Users of such
services."
It will be noted that the above-quoted
provision has no teeth, so the concessionaire
can defy the government without fear of any
sanction. Moreover, Section 6.06 - taken
together with Section 6.03(c) of the ARCA -

falls short of the standard set by the BOT Law

as amended, which expressly requires in
Section 2(b) that the project proponent is
"allowed to charge facility users appropriate
tolls,
fees,
rentals
and
charges not
exceeding those proposed in its bid or
as negotiated and incorporated in the
contract x x x."
The
Piatco
Contracts
Violate
Constitutional
Prohibitions
Against
Impairment
of
Contracts
and
Deprivation of Property Without Due
Process
Earlier, I discussed how Section 3.01(e) 84 of
both the CA and the ARCA requires
government, through DOTC/MIAA, not to
permit the carry-over to Terminal III of the
services and operations of certain service
providers currently operating at Terminal I
with subsisting contracts.
By the In-Service Date, Terminal III shall be
the only facility to be operated as an
international passenger terminal at the
NAIA;85 thus, Terminals I and II shall no longer
operate as such,86 and no one shall be
allowed to compete with Piatco in the
operation of an international passenger
terminal in the NAIA.87 The bottom line is that,
as of the In-Service Date, Terminal III will be
the only terminal where the business of
providing
airport-related
services
to
international airlines and passengers may be
conducted at all.
Consequently, government through the
DOTC/MIAA will be compelled to cease
honoring existing contracts with service
providers after the In-Service Date, as they
cannot be allowed to operate in Terminal III.

In short, the CA and the ARCA obligate and

constrain government to break its existing
contracts with these service providers.
Notably, government is not in a position to
require Piatco to accommodate the displaced
service providers, and it would be unrealistic
to think that these service providers can
perform their service contracts in some other
international airport outside Luzon. Obviously,
then, these displaced service providers are to borrow a quaint expression - up the river
without a paddle. In plainer terms, they will
have lost their businesses entirely, in the
blink of an eye.
What we have here is a set of contractual
provisions that impair the obligation of
contracts and contravene the constitutional
prohibition against deprivation of property
without due process of law.88
Moreover, since the displaced service
providers, being unable to operate, will be
forced to close shop, their respective
employees - among them Messrs. Agan and
Lopez et al. - have very grave cause for
concern, as they will find themselves out of
employment and bereft of their means of
livelihood. This situation comprises still
another
violation
of
the
constitution
prohibition against deprivation of property
without due process.
True, doing business at the NAIA may be
viewed more as a privilege than as a right.
Nonetheless, where that privilege has been
availed of by the petitioners-in-intervention
service providers for years on end, a situation
arises, similar to that in American Interfashion v. GTEB.89 We held therein that a
privilege enjoyed for seven years "evolved
into some form of property right which should
not be removed x x x arbitrarily and without

due process." Said pronouncement is

particularly relevant and applicable to the
situation at bar because the livelihood of the
employees of petitioners-intervenors are at
stake.
The
Piatco
Contracts
Violate
Constitutional
Prohibition
Against Deprivation of Liberty Without
Due Process
The Piatco Contracts by locking out existing
service providers from entry into Terminal III
and restricting entry of future service
providers, thereby infringed upon the
freedom - guaranteed to and heretofore
enjoyed by international airlines - to contract
with local service providers of their choice,
and vice versa.
Both the service providers and their client
airlines will be deprived of the right to liberty,
which includes the right to enter into all
contracts,90 and/or the right to make a
contract in relation to one's business.91
By Creating New Financial Obligations
for
Government,
Supplements to the ARCA Violate the
Constitutional
Ban on Disbursement of Public Funds
Without Valid Appropriation
Clearly prohibited by the Constitution is the
disbursement of public funds out of the
treasury, except in pursuance of an
appropriation made by law.92 The immediate
effect of this constitutional ban is that all the
various
agencies
of
government
are
constrained to limit their expenditures to the
amounts appropriated by law for each fiscal
year; and to carefully count their cash before
taking on contractual commitments. Giving

flesh and form to the injunction of the

fundamental law, Sections 46 and 47 of
Executive Order 292, otherwise known as the
Administrative Code of 1987, provide as
follows:
"Sec.
46.
Appropriation
Before
Entering into Contract. - (1) No
contract involving the expenditure of
public funds shall be entered into
unless there is an appropriation
therefor, the unexpended balance of
which, free of other obligations, is
sufficient to cover the proposed
expenditure; and . .
"Sec.
47.
Certificate
Showing
Appropriation to Meet Contract. Except in the case of a contract for
personal service, for supplies for
current consumption or to be carried
in stock not exceeding the estimated
consumption for three (3) months, or
banking transactions of governmentowned or controlled banks, no contract
involving the expenditure of public
funds by any government agency shall
be entered into or authorized unless
the proper accounting official of the
agency concerned shall have certified
to the officer entering into the
obligation that funds have been duly
appropriated for the purpose and that
the amount necessary to cover the
proposed contract for the current
calendar
year
is
available
for
expenditure
on account thereof,
subject to verification by the auditor
concerned. The certificate signed by
the proper accounting official and the
auditor who verified it, shall be
attached to and become an integral
part of the proposed contract, and the
sum so certified shall not thereafter be

available for expenditure for any other

purpose until the obligation of the
government agency concerned under
the contract is fully extinguished."
Referring to the aforequoted provisions, this
Court has held that "(I)t is quite evident from
the tenor of the language of the law that the
existence
of
appropriations
and
the
availability of funds are indispensable prerequisites to or conditions sine qua non for
the execution of government contracts. The
obvious intent is to impose such conditions
as a priori requisites to the validity of the
proposed contract."93
Notwithstanding the constitutional ban,
statutory
mandates
and
Jurisprudential
precedents, the three Supplements to the
ARCA, which were not approved by NEDA,
imposed on government the additional
burden of spending public moneys without
prior appropriation.

owned or operated by it and by third

persons under its control in order to
ensure compliance with international
standards; and holding MIAA liable to
Piatco for the latter's losses, expenses
and damages as well as for the latter's
liability to third persons, in case MIAA
fails to perform such obligations; in
addition, MIAA will also be liable for
the incremental and consequential
costs of the remedial work done by
Piatco on account of the former's
default.
Section 4 of the FS imposed on
government ten (10) "Additional
Special Obligations," including the
following:
o

Providing thru MIAA the land

required by Piatco for the
taxilane and one taxiway, at no
cost to Piatco

In the First Supplement ("FS") dated August

27, 1999, the following requirements were
imposed on the government:

Implementing
government's existing
drainage master plan

To construct, maintain and keep in

good repair and operating condition all
airport support services, facilities,
equipment and infrastructure owned
and/or operated by MIAA, which are
not part of the Project or which are
located outside the Site, even though
constructed
by
Concessionaire
including the access road connecting
Terminals II and III and the taxilane,
taxiways and runways

Coordinating with DPWH the

financing, implementation and
completion of the following
works before the In-Service
Date:
three
left-turning
overpasses (Edsa to Tramo St.,
Tramo to Andrews Ave., and
Manlunas Road to Sales Ave.)
and a road upgrade and
improvement
program
involving widening, repair and
resurfacing of Sales Road,
Andrews Avenue and Manlunas
Road; improvement of Nichols
Interchange; and removal of

To obligate the MIAA to provide

funding for the upkeep, maintenance
and repair of the airports and facilities

the
storm

squatters
Avenue
o

along

Andrews

as stipulations for compliance on a "bestefforts basis" only.

Dealing directly with BCDA and

the Philippine Air Force in
acquiring additional land or
right of way for the road
upgrade
and
improvement
program

To
determine
whether
the
additional
obligations under the Supplements may really
be undertaken on a best-efforts basis only,
the nature of each of these obligations must
be examined in the context of its relevance
and significance to the Terminal III Project, as
well as of any adverse impact that may result
if such obligation is not performed or
undertaken on time. In short, the criteria for
determining whether the best-efforts basis
will apply is whether the obligations
are critical to the success of the Project and,
accordingly, whether failure to perform them
(or to perform them on time) could result in a
material breach of the contract.

Requiring government to work

for the immediate reversion to
MIAA of the Nayong Pilipino
National Park, in order to
permit the building of the
second west parallel taxiway

Section 5 of the FS also provides that

in lieu of the access tunnel, a surface
access
road
(T2-T3)
will
be
constructed. This provision requires
government to expend funds to
purchase additional land from Nayong
Pilipino and to clear the same in order
to be able to deliver clean possession
of the site to Piatco, as required in
Section 5(c) of the FS.
On the other hand, the Third Supplement
("TS") obligates the government to deliver,
within 120 days from date thereof, clean
possession of the land on which the T2-T3
Road is to be constructed.
The
foregoing
contractual
stipulations
undeniably impose on government the
expenditures of public funds not included in
any congressional appropriation or authorized
by any other statute. Piatco however
attempts to take these stipulations out of the
ambit of Sections 46 and 47 of the
Administrative Code by characterizing them

Viewed in this light, the "Additional Special

Obligations" set out in Section 4 of the FS
take on a different aspect. In particular, each
of the following may all be deemed to play a
major role in the successful and timely
prosecution of the Terminal III Project: the
obtention of land required by PIATCO for the
taxilane and taxiway; the implementation of
government's existing storm drainage master
plan; and coordination with DPWH for the
completion
of
the
three
left-turning
overpasses before the In-Service Date, as well
as acquisition and delivery of additional land
for the construction of the T2-T3 access road.
Conversely, failure to deliver on any of these
obligations may conceivably result in
substantial prejudice to the concessionaire, to
such an extent as to constitute a material
breach of the Piatco Contracts. Whereupon,
the concessionaire may outrightly terminate
the Contracts pursuant to Section 8.01(b)(i)
and (ii) of the ARCA and seek payment of
Liquidated Damages in accordance with
Section 8.02(a) of the ARCA; or the

concessionaire
may
instead
require
government to pay the Incremental and
Consequential Losses under Section 1.23 of
the ARCA.94The logical conclusion then is that
the obligations in the Supplements are not to
be performed on a best-efforts basis only, but
are unarguably mandatory in character.
Regarding MIAA's obligation to coordinate
with
the
DPWH
for
the
complete
implementation of the road upgrading and
improvement program for Sales, Andrews and
Manlunas Roads (which provide access to the
Terminal III site) prior to the In-Service Date, it
is essential to take note of the fact that there
was a pressing need to complete the program
before the opening of Terminal III. 95 For that
reason, the MIAA was compelled to enter into
a memorandum of agreement with the DPWH
in order to ensure the timely completion of
the road widening and improvement program.
MIAA agreed to advance the total amount of
P410.11 million to DPWH for the works, while
the latter was committed to do the following:
"2.2.8.
Reimburse
all
advance
payments to MIAA including but not
limited to interest, fees, plus other
costs of money within the periods
CY2004 and CY2006 with payment of
no less than One Hundred Million
Pesos (PhP100M) every year.
"2.2.9. Perform all acts necessary to
include in its CY2004 to CY2006
budget allocation the repayments for
the advances made by MIAA, to ensure
that the advances are fully repaid by
CY2006. For this purpose, DPWH shall
include
the
amounts
to
be
appropriated for reimbursement to
MIAA in the "Not Needing Clearance"
column of their Agency Budget Matrix

(ABM) submitted to the Department of

Budget and Management."
It can be easily inferred, then, that DPWH did
not set aside enough funds to be able to
complete the upgrading program for the
crucially situated access roads prior to the
targeted opening date of Terminal III; and
that, had MIAA not agreed to lend the P410
Million, DPWH would not have been able to
complete the program on time. As a
consequence, government would have been
in breach of a material obligation. Hence, this
particular undertaking of government may
likewise not be construed as being for bestefforts compliance only.
They also Infringe on the Legislative
Prerogative and Power Over the Public
Purse
But the particularly sad thing about this
transaction between MIAA and DPWH is the
fact that both agencies were maneuvered into
(or allowed themselves to be maneuvered
into) an agreement that would ensure
delivery of upgraded roads for Piatco's
benefit, using funds not allocated for that
purpose. The agreement would then be
presented to Congress as a done deal.
Congress would thus be obliged to uphold the
agreement and support it with the necessary
allocations and appropriations for three years,
in order to enable DPWH to deliver on its
committed repayments to MIAA. The net
result is an infringement on the legislative
power over the public purse and a diminution
of Congress' control over expenditures of
public funds - a development that would not
have come about, were it not for the
Supplements. Very clever but very illegal!
EPILOGUE
What Do We Do Now?

In the final analysis, there remains but one

ultimate question, which I raised during the
Oral Argument on December 10, 2002: What
do we do with the Piatco Contracts and
Terminal III?96 (Feeding directly into the
resolution of the decisive question is the
other nagging issue: Why should we bother
with determining the legality and validity of
these contracts, when the Terminal itself has
already been built and is practically
complete?)
Prescinding from all the foregoing disquisition,
I find that all the Piatco contracts, without
exception, are void ab initio, and therefore
inoperative. Even the very process by which
the contracts came into being - the bidding
and the award - has been riddled with
irregularities galore and blatant violations of
law and public policy, far too many to ignore.
There is thus no conceivable way, as
proposed by some, of saving one (the original
Concession Agreement) while junking all the
rest.
Neither is it possible to argue for the
retention of the Draft Concession Agreement
(referred to in the various pleadings as the
Contract Bidded Out) as the contract that
should be kept in force and effect to govern
the situation, inasmuch as it was never
executed by the parties. What Piatco and the
government executed was the Concession
Agreement which is entirely different from the
Draft Concession Agreement.
Ultimately, though, it would be tantamount to
an outrageous, grievous and unforgivable
mutilation of public policy and an insult to
ourselves if we opt to keep in place a contract
- any contract - for to do so would assume
that we agree to having Piatco continue as
the concessionaire for Terminal III.

Despite all the insidious contraventions of the

Constitution, law and public policy Piatco
perpetrated,
keeping
Piatco
on
as
concessionaire and even rewarding it by
allowing it to operate and profit from Terminal
III - instead of imposing upon it the stiffest
sanctions permissible under the laws - is
unconscionable.
It is no exaggeration to say that Piatco may
not really mind which contract we decide to
keep in place. For all it may care, we can do
just as well without one, if we only let it
continue and operate the facility. After all, the
real money will come not from building the
Terminal, but from actually operating it for
fifty or more years and charging whatever it
feels like, without any competition at all. This
scenario must not be allowed to happen.
If the Piatco contracts are junked altogether
as I think they should be, should not AEDC
automatically be considered the winning
bidder and therefore allowed to operate the
facility? My answer is a stone-cold 'No'. AEDC
never won the bidding, never signed any
contract, and never built any facility. Why
should it be allowed toautomatically step in
and benefit from the greed of another?
Should government pay at all for reasonable
expenses incurred in the construction of the
Terminal? Indeed it should, otherwise it will be
unjustly enriching itself at the expense of
Piatco and, in particular, its funders,
contractors and investors - both local and
foreign. After all, there is no question that the
State needs and will make use of Terminal III,
it being part and parcel of the critical
infrastructure
and
transportation-related
programs of government.
In Melchor v. Commission on Audit,97 this
Court held that even if the contract therein

was void,
the
principle
of payment
by quantum meruit was found applicable, and
the contractor was allowed to recover
the reasonablevalue of the thing or services
rendered (regardless of any agreement as to
the supposed value), in order to avoid unjust
enrichment on the part of government. The
principle of quantum meruit was likewise
applied
in Eslao
v.
Commission
on
Audit,98 because to deny payment for a
building almost completed and already
occupied would be to permit government to
unjustly enrich itself at the expense of the
contractor. The same principle was applied
in Republic v. Court of Appeals.99
One possible practical solution would be for
government - in view of the nullity of the
Piatco contracts and of the fact that Terminal
III has already been built and is almost
finished - to bid out the operation of the
facility under the same or analogous
principles
as
build-operate-and-transfer
projects. To be imposed, however, is the
condition that the winning bidder must pay
the builder of the facility a price fixed by
government based on quantum meruit; on
the real, reasonable - not inflated - value of
the built facility.
How the payment or series of payments to
the
builder,
funders,
investors
and
contractors will be staggered and scheduled,
will have to be built into the bids, along with
the
annual
guaranteed
payments
to
government. In this manner, this whole sordid
mess could result in something truly
beneficial for all, especially for the Filipino
people.
WHEREFORE, I vote to grant the Petitions
and
to
declare
the
subject
contracts NULL and VOID.